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Competition with Aftermarket Power when Consumers are Heterogeneous

Authors/Editors: Kretschmer, T.
Published: Forthcoming
Type: Articles in Refereed Journals (International)
Published by: Journal of Economics & Management Strategy, 26(1), pp. 96-122

Abstract

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below-cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal costs. While for intermediate aftermarket power their presence leads to a competition-softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. Firms’ equilibrium profits can therefore be decreasing in aftermarket power for high values of aftermarket power but are always higher than for low aftermarket power.

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