Exercising Market Power in Proprietary Aftermarkets |
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| Authors: | Severin Borenstein Jeffrey K Mackie-Mason Janet S Netz |
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| Institution: | Haas School of Business University of California Berkeley, CA 94720-1900 and NBER;School of Information Department of Economics and School of Public Policy University of Michigan Ann Arbor, MI 48109-1092;Department of Economics Purdue University West Lafayette, IN 47907-1310 |
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| Abstract: | Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked-in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability. |
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