Aftermarkets: The monopoly case

Abstract

Consider a monopolist who sells a durable good, and repairs the good if it breaks down. Suppose that contracts that specify future repair prices cannot be written, so that there is an aftermarket" situation. When consumers are risk-averse, the monopolist chooses inefficiently high repair prices; if complete warranties were possible, he would fully insure consumers by guaranteeing to repair the good at a zero fee. To increase efficiency, the monopolist may attract a rival firm in the aftermarket, or lease the good. The latter option restores first-best efficiencyMonopoly;Leasing;After Sales Service;Repair;microeconomics