Exercising Market Power in Proprietary Aftermarkets

Journal of Economics and Management Strategy, Vol. 9, No. 2, pp. 157-188, 2000

Posted: 7 Apr 2007

See all articles by Severin Borenstein

Severin Borenstein

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Jeffrey K. MacKie-Mason

UC Berkeley; University of Michigan

Janet S. Netz

ApplEcon, LLC

Abstract

In many recent antitrust cases, manufacturers of complex high-technology equipment have been accused of exercising market power in the sale of proprietary service or parts necessary to maintain the machines they produce. The manufacturer generally concedes that it has market power in selling the aftermarket service or parts, but argues that it would not exercise such power because high aftermarket prices would cause consumers to select a different brand in the competitive market for the original equipment. We study the incentive to exercise market power in aftermarkets when the original equipment market is perfectly competitive, a differentiated duopoly, or monopolized. In all cases, we show that the price in the aftermarket will exceed marginal cost. Furthermore, our analysis indicates that aftermarket prices may actually be higher when the equipment market is more competitive. Nonetheless, we suggest that in a richer model P in which equipment sellers might want to price discriminate, create barriers to entry, or influence the pace at which users upgrade to newer models P firms in less competitive equipment markets are likely to have a greater incentive to maintain a monopoly position in the sale of their aftermarket products.

Suggested Citation

Borenstein, Severin and MacKie-Mason, Jeffrey K. and Netz, Janet S., Exercising Market Power in Proprietary Aftermarkets. Journal of Economics and Management Strategy, Vol. 9, No. 2, pp. 157-188, 2000, Available at SSRN: https://ssrn.com/abstract=978050

Severin Borenstein (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-3689 (Phone)
707-885-2508 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey K. MacKie-Mason

UC Berkeley ( email )

102 South Hall
Berkeley, CA 94720-4600
United States

HOME PAGE: http://jeff-mason.com

University of Michigan ( email )

Ann Arbor, MI 48109-1092
United States

HOME PAGE: http://http:/jeff-mason.com/

Janet S. Netz

ApplEcon, LLC ( email )

617 East Huron Street
Ann Arbor, MI 48104
United States
(734) 213-1930 (Phone)

HOME PAGE: http://www.applecon.com

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