Tying, Upgrades, and Switching Costs in Durable-Goods Markets

43 Pages Posted: 6 Jul 2005  

Dennis W. Carlton

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Michael Waldman

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: June 2005

Abstract

This paper investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses of tying have found that a monopolist of one product cannot increase its profits and reduce social welfare by tying and monopolizing a complementary product if the initial monopolized product is essential, where essential means that all uses of the complementary good require the initial monopolized product. We show that this is not true in durable-goods settings characterized by product upgrades, where we show tying is especially important when consumer switching costs are present. In addition to our results concerning tying our analysis also provides a new rationale for leasing in durable-goods markets. We also discuss various extensions including the role of the reversibility of tying as well as the antitrust implications of our analysis.

Suggested Citation

Carlton , Dennis W. and Waldman, Michael, Tying, Upgrades, and Switching Costs in Durable-Goods Markets (June 2005). NBER Working Paper No. w11407. Available at SSRN: https://ssrn.com/abstract=741555

Dennis W. Carlton (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-322-0215 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Waldman

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-8631 (Phone)

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