Aftermarket Duopoly

Abstract

Firm 1 makes a computer printer, the foremarket product, and ink cartridges, the aftermarket product. Firm 2 makes compatible cartridges. They compete in a Cournot or Stackelberg aftermarket. The price of the printer is alpha times the aftermarket consumer surplus, where alpha is between zero and one. We find the conditions under which (1) Firm 1's cartridge price is below marginal cost; (2) Firm 1 benefits when Firm 2 adds value to its cartridge or lowers its marginal cost; (3) Firm 1 is more profitable sharing the aftermarket than it would be alone; and (4) Firm's 1 profit increases when it stops making ink cartridges. The model is similar to the standard Cournot and Stackelberg models, but introduction of the capture parameter has profound effects.

Keywords: Two-Part Pricing, Two-Part Tariff, Aftermarket, Captured Consumer Surplus, Product Lock-In, Price Below Marginal Cost, Complementary Good, Razors and Blades, Vertically Open Platform, Product Lock-In, Vertical Tying, Original Equipment Manufacturer, Independent Service Organization

JEL Classification: D42, L11