Working Paper: CEPR ID: DP6802
Authors: Lus M. B. Cabral
Abstract: I revisit the relation between aftermarket power and basic market competition. I consider an infinite period model with overlapping consumers: in each period, one consumer is born and joins one of the existing installed bases, then aftermarket payoffs are received by sellers and consumers, then finally one consumer dies. I derive the unique symmetric Markov equilibrium of this game and the resulting stationary distribution over states (each firm's installed base). I show that an increase in aftermarket power increases the extent of increasing dominance (i.e., a large firm is increasingly more likely to capture a new consumer than a small firm). This in turn leads to several implications of aftermarket power. First, the stationary distribution places greater weight on asymmetric states. Second, social welfare is greater. Third, under some conditions consumer welfare is also greater. Fourth, the value of a firm with zero installed base is lower, and so barriers to entry are higher.
Keywords: aftermarkets; dynamic price competition; market power
JEL Codes: L1; L4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in aftermarket power (L19) | Increased likelihood that a large firm captures a new consumer (D26) |
| Increase in aftermarket power (L19) | Increased dominance in the basic market (D43) |
| Increase in aftermarket power (L19) | Greater weight on asymmetric states in stationary distribution (C62) |
| Increase in aftermarket power (L19) | Market concentration increases (L11) |
| Increase in aftermarket power (L19) | Greater social welfare (D69) |
| Increase in aftermarket power (L19) | Enhanced total welfare (D69) |
| Increase in aftermarket power (L19) | Lower value of a firm with zero installed base (D25) |
| Increase in aftermarket power (L19) | Higher barriers to entry (D43) |
| Increase in aftermarket power (L19) | Greater consumer welfare (D69) |