Price Discrimination Via Proprietary Aftermarkets

Abstract

Price markups over marginal cost are often higher on "aftermarket" parts and services for durable goods than they are on the goods themselves. A popular explanation is that the aftermarket good is used as a "metering" device. This paper explores what happens in the metering model as foremarket competition increases, and examines the implications of adding a one-time enhancement to the model along with the aftermarket input. It finds that as foremarket competition increases, markups in the aftermarket drop to zero before markups in the foremarket. It also finds that a one-time enhancement may expropriate the metering role of an aftermarket input.

Keywords: aftermarket, tying, metering, price discrimination

JEL Classification: L1, L4, K2