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On the Pricing of Replacement Parts

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Abstract

This paper presents a model in which a good is made up of two parts, and each part asts one or two periods, with known probabilities. The analysis includes consumer decisions regarding part replacement, as well as profit maximization under monopoly and oligipoly. It is found that firms have incentives to supply all part for replacement, rather than force the consumer to replace the entire good when a single part is needed. In oligopoly, the non-collusive equilibrium when parts are not compatible acress brands involves pricing entire goods below marginal cost and individual parts above marginal cost. The paper also puts forward a testable hypothesis about the auto parts market, namely that the emergence of generic auto parts in the 1980s and 1990s may have not only driven down the prices of parts with which they competed, but also driven up the prices of other parts.

Suggested Citation

  • Max Blouin, 2002. "On the Pricing of Replacement Parts," Cahiers de recherche CREFE / CREFE Working Papers 147, CREFE, Université du Québec à Montréal.
    • Handle: RePEc:cre:crefwp:147
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    replacement parts; capital replacement; aftermarkets; compatibility; antitrust.;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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