Aftermarket Monopolization: The Emerging Consensus in Economics

• Author: Lorenzo Coppi
• DOI: 10.1177/0003603X0705200104
• Date: 01 March 2007
• Published date: 01 March 2007
• Subject Matter: Article

THE ANTITRUST BULLETIN:Vol.52, No. l/Spring 2007 :53

Aftermarket

monopolization:

the emerging consensus in economics

By

LORENZO

COPPI*

The

accepted

economic

definition

of

aftermarket

is

provided

by

Shapiro

and

Teece

and

entails

two

characteristics:

"(1)

the aftermarket

product

or service is

used

together

with

a

primary

product,

and

(2)

the

aftermarket

product

or service is

purchased

after

the

primary

product."I

There is a significant

body

of literature discussing the economics

of aftermarket competition. Especially after

Kodak?

the economic liter-

ature

has debated at length

whether

anticompetitive effects are likely

to arise from

the

supplier of a

primary

good

monopolizing the after-

market

for

its

product.

The

concern

is

that,

having

obtained

or

defended

amonopoly in

the

aftermarket for its product, a

supplier

of

a

primary

good

would

be able to charge a

supra

competitive aftermar-

*Vice President, CRA

International,

Washington, DC.

Carl

Shapiro

&

David

J.

Teece, Systems

Competition

and Aftermarkets: an

Economic

Analysisof Kodak, 39

ANTITRUST

BULL.

135 (1994).

Eastman

Kodak

Co. v.

Image

Technical Servs., Inc., 504 U.S. 451 (1992).

For

economic

commentaries

of

the

case, see

Carl

Shapiro,

Aftermarkets and

Customer

Welfare:

Making

Sense

of

Kodak,

63

ANTITRUST

L.J.

483 (1995);

Steven

C.

Salop,

The First Principles Approach to Antitrust at the Millennium, 68

ANTITRUST

L.J.

187 (2000);

and

Dennis

W.

Carlton,

A

General

Analysis of Exclu-

sionary

Conduct

and

Refusal

to

Deal-Why

Aspen

and

Kodak

areMisguided, 68

ANTITRUST

L.J.

659 (2001).

©2007 by

Federal

Legal

Publications, Inc.

54 : THE

ANTITRUST

BULLETIN:

Vol.52, No. l/Spring 2007

ket price to its consumers. The discussion

in

the

economic literature

typically focuses on

whether

a

primary

good

supplier

would

find it

profitable to charge asupracompetitive aftermarket price to its cap-

tive installed base, given the possible resulting loss of sales of the pri-

mary

good

(and

associated

loss of

future

aftermarket

sales).' Two

competing

views have been

put

forward

in

this regard: the Chicago

view,

which

maintains

that

it is unlikely

that

a

primary

good

supplier

would

find it profitable to exploit its

installed

base;

and

the

post-

Chicago view,

which

contends that, in general,

primary

good suppli-

ers

have

an incentive to raise prices to their installed base.

It

is

now

established

that

in theory,

even

under

fairly general cir-

cumstances, the potential for

harm

from aftermarket monopolization

is present.

It

is also clear

that

the

source of

the

potential for anticom-

petitive

harm,

i.e., the

manufacturer's

incentive to exploit its installed

base,

may

be present even

when

the

primary

market

is quite competi-

tive

and

consumers

are fully informed

about

costs

over

the entire life

of the

primary

product

(lifecycle cost).'

However, significant debate remains on

the

likelihood

and

signifi-

cance of

such

theoretical potential. The conclusion is that acase-by-

case

investigation

is

needed

in

order

to

determine

whether

In

addition

to

the

literature focused on

aftermarket

competition, there

are

at least

two

strands

of the economic literature

that

are

relevant to this dis-

cussion. First is

the

economic literature

on

competition

between

systems of

complementary

products.

See,

e.g., Michael L. Katz &

Carl

Shapiro, Systems

Competition

and Network

Effects,

8 J.

ECON.

PERSPECTIVES

93 (1994);Stanley M.

Besen &

Joseph

Farrell,

Choosing

How to

Compete:

Strategies

and

Tactics

in Stan-

dardization, 8 J.

ECON.

PERSPECTIVES

117 (1994);

and

Joseph

Farrell &

Garth

Saloner, Standardization, Compatibility, and Innovation, 16

RAND

J.

ECON.

70

(1985). Second is

the

large economic literature

on

bundling

and

foreclosure.

See,

e.g., Michael D. Whinston, Tying,

Foreclosure,

and

Exclusion,

80 AM.

ECON.

REv.

837 (1990);

and

Dennis Carlton &Michael Waldman, The

Strategic

Useof

Tying to

Preserve

and

Create

Market Power in Evolving Industries, 33

RAND

J.

ECON.

194 (2002).

The

lifecycle cost includes

the

original

purchase

price of the

equip-

ment,

but

also

expected

maintenance

costs,

including

supplies,

parts,

and

service

over

the useful life of the

product

(e.g., a

car's

lifecycle cost includes

the

purchase

price, fuel, maintenance,

and

insurance,

but

excludes the sal-

vage value).