Exercising market power in proprietary aftermarkets

Over 20 recent antitrust cases have turned on whether competition in comple x durable-equipment markets prevents manufacturers from exercising market p ower over proprietary aftermarket products and services. We show that the p rice in the aftermarket trill exceed marginal cost despite competition in t he equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked- in equipment owners. The result holds for undifferentiated Bertrand competi tion, differentiated duopoly, and monopoly equipment markets. We also exami ne the effects of market growth and equipment durability.