A Switching Costs Explanation of Tying and Warranties

Edward Iacobucci

The Journal of Legal Studies, 2008, vol. 37, issue 2, 431-458

Abstract: Competitive markets in which buyers face a cost of switching suppliers can result in an inefficient pricing pattern: sellers initially seek to gain market share with below-cost prices, then later exploit past customers with above-cost prices. This article shows that, rather than simply offer cash discounts initially, sellers can bundle a tied good that is worth more to high-demand buyers. This bundling strategy can efficiently screen out socially undesirable sales to low-demand buyers that a straight cash discount would invite. This theory can explain warranties, which are a kind of tying contract in which aftermarket service is bundled with a durable good. The theory also has application in imperfectly competitive markets, in which sellers for reasons of price discrimination prefer a pricing pattern with high aftermarket prices and low durable-good prices. Finally, the theory has implications for antitrust law in the Kodak setting and antitrust cases involving warranties specifically. (c) 2008 by The University of Chicago. All rights reserved.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1086/589667 link to full text (text/html)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlstud:v:37:y:2008:i:2:p:431-458

Access Statistics for this article

More articles in The Journal of Legal Studies from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().