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A Switching Costs Explanation of Tying and Warranties

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  • Edward Iacobucci

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.

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  • Edward Iacobucci, 2008. "A Switching Costs Explanation of Tying and Warranties," The Journal of Legal Studies, University of Chicago Press, vol. 37(2), pages 431-458, June.
    • Handle: RePEc:ucp:jlstud:v:37:y:2008:i:2:p:431-458
    DOI: 10.1086/589667
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    References listed on IDEAS

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    Cited by:

    1. Edward Iacobucci & Francesco Ducci, 2019. "The Google search case in Europe: tying and the single monopoly profit theorem in two-sided markets," European Journal of Law and Economics, Springer, vol. 47(1), pages 15-42, February.

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