Market Power in Aftermarkets

Abstract

Many recent antitrust cases involve aftermarkets the provision of spare parts or service for use with a previously purchased durable good. These cases rely on the Supreme Court's decision in Eastman Kodak Co. v. Image Technical Services, Inc. to argue that imperfectly informed consumers may find themselves 'locked in' to a particular brand of equipment after they make their initial equipment purchase. As a result, even if intensive competition exists when consumers make their equipment purchase, a manufacturer may possess significant market power, if not a monopoly, in the aftermarket and may use this power to increase aftermarket prices.

This paper explains why aftermarket prices often are high and examines the implications of such high aftermarket prices for antitrust. Contrary to the 'lock-in' analysis of the Supreme Court's decision, the many instances of systematically high aftermarket prices we observe in the marketplace are unlikely due to manufacturers taking advantage of imperfectly informed consumers to charge supracompetitive package prices. We show that even if consumers are totally uninformed about aftermarket conditions when they purchase their equipment, they pay a competitive package price because competition forces manufacturers to offset later aftermarket price increases with initial equipment price decreases.

JEL Classification: L41, K21