Exercising Market Power in Proprietary Aftermarkets

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.