Consumer Myopia, Standardization and Aftermarket Monopolization

Abstract

I examine firms' aftermarket behavior in the presence of myopic consumers who optimize period-by-period. Paradoxically, a monopolist's profit decreases with the percentage of myopic consumers, whereas competitive firms earn supranormal profits from myopic consumers through the strategic use of incompatibility. Contrary to the traditional view, primary market competition does not dissipate aftermarket rents. However, government interventions to reinforce aftermarket competition such as a standardization requirement may lead to the partial collapse of the primary market. Implications to the behavior approach of IO study and the hypothesis of planned obsolescence are discussed.

JEL Classification: D10, L10, L41