27 Pages Posted: 24 Oct 2010 Last revised: 1 Jul 2014
Date Written: May 22, 2011
Many durable products cannot be used without a contingent consumable product, e.g. printers require ink, iPods require songs, razors require blades, etc. For such products, manufacturers may be able to lock-in consumers by making their products incompatible with consumables that are produced by other firms. We examine the effectiveness of such a strategy in the presence of strategic consumers who anticipate the future prices of both the durable product and the contingent consumable. Under a lock-in strategy, the manufacturer has pricing power over the contingent consumable which she can use to extract additional rents from higher valuation consumers, but such pricing power may also reduce consumers' willingness to pay for the durable because it subjects them to being held-up with higher consumables prices in the future. Restricting our attention to linear pricing policies, we find that if the manufacturer can commit to shut down production of her durable after an initial one-time sale, then competition from another consumable of an appropriately degraded level of quality can benefit the manufacturer by mitigating consumers' fears of being held-up. On the other hand, when the manufacturer cannot commit to shutting down production of her durable, then her own output of additional durables gives her an incentive to keep consumables prices low, and competition in the consumables market is less beneficial.
Keywords: tying, durability, time inconsistency, strategic consumers
JEL Classification: D91, L10
Suggested Citation: Suggested Citation
Gilbert, Stephen and Jonnalagedda, Sreelata, Durable Products, Time Inconsistency, and Lock-In (May 22, 2011). McCombs Research Paper Series No. IROM-09-10. Available at SSRN: https://ssrn.com/abstract=1695691 or http://dx.doi.org/10.2139/ssrn.1695691