Mitigating Hold-Up Through Complementarities and Refunds

45 Pages Posted: 27 Jan 2012 Last revised: 12 Dec 2016

Jenny R. Hawkins

Case Western Reserve University, Weatherhead School of Management

Date Written: December 10, 2016

Abstract

Many valuable composite goods or property rights exist only by assembling multiple, monopoly-supplied components. Since a monopolist exclusively owns each component, hold-up by the last seller can result. First I design a model to show how sunk cost explains this assembly problem. Then I consider two factors that reduce sunk cost, determining conditions for which each mitigates hold-up. Specifically, I implement varied degrees of complementarities and levels of refundability of the component goods. No known previous research examines the assembly problem in terms of sunk cost or considers refunds, and little research models imperfect complementarities. I show if at least the first component purchased has stand alone value, hold-up is mitigated under any refund level. However, if only the last component purchased has stand alone value, averting hold-up depends on capacity constraints, degree of complementarities, price discrimination, and level of refund. Regardless of the degree of complementarities, full refunds prevent hold-up, while zero and partial refunds do not. Welfare analysis reveals conditions for a first or second mover advantage and when sellers endogenously choose a partial or full refund. This research offers settings when degrees of complementarity and refundability reduce sunk cost, often enough to prevent hold-up. My results also suggest policies to overcome inefficiencies in assembling property rights or component goods, such as legal requirements on full refunds, regulation on the order in which components must be purchased, and price discrimination prohibition.

Keywords: anticommons, complementary monopoly, complementarities, refund, hold-up, double marginalization, property rights

JEL Classification: D4, D70, K11, K19, L1

Suggested Citation

Hawkins, Jenny R., Mitigating Hold-Up Through Complementarities and Refunds (December 10, 2016). Available at SSRN: https://ssrn.com/abstract=1992052 or http://dx.doi.org/10.2139/ssrn.1992052

Jenny Rae Hawkins (Contact Author)

Case Western Reserve University, Weatherhead School of Management ( email )

Cleveland, OH 44106
United States

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