ISSN 1045-6333 the DURAPOLIST PUZZLE: MARKET POWER in DURABLE-GOODS MARKETS Barak Y. Orbach* Discussion Paper No. 263 9/99
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#ISSN 1045-6333 THE DURAPOLIST PUZZLE: MARKET POWER IN DURABLE-GOODS MARKETS Barak Y. Orbach* Discussion Paper No. 263 9/99 Harvard Law School Cambridge, MA 02138 The Center for Law, Economics, and Business is supported by a grant from the John M. Olin Foundation. www.law.harvard.edu/Programs/olin_center *John M. Olin Fellow in Law and Economics and SJD Candidate, Harvard Law School. JEL Class: D42, K21, L12, L41 THE DURAPOLIST PUZZLE: MARKET POWER IN DURABLE-GOODS MARKETS Barak Y. Orbach* Abstract This paper presents the time-inconsistency problem of the durable-goods monopolist, the durapolist. The durapolist may encounter difficulties in garnering his potential monopolistic rent, because he is likely to reduce his prices over time. To overcome this time inconsistency, over the years durapolists have developed various business strategies. I have studied the main strategies, their anticompetitive effects and the ways they were treated by the courts, lawyers and economists. In particular, the various practices of commitments to future prices, planned obsolescence, tying arrangements, and leasing are examined. *John M. Olin Fellow in Law and Economics and SJD Candidate, Harvard Law School. -1- THE DURAPOLIST PUZZLE: MARKET POWER IN DURABLE-GOODS MARKETS * Barak Y. Orbach © Barak Y. Orbach. All rights reserved. I. Introduction.................................................................................................................................................3 II. Geometric Illustration of the Durapolist Problem ...................................................................................6 II.1. The Durapolist’s Time-Inconsistency Problem ............................................................................. 6 II.2. The Model..................................................................................................................................... 8 II.3. The Durapolist’s Chart and its Implications ................................................................................ 11 II.4. Welfare Analysis of the Durapolist’s Time Inconsistency .......................................................... 15 III. The Committed Durapolist: Commitment to Future Prices ................................................................20 III.1. A Matter of Confidence .......................................................................................................... 20 III.2. Reputation............................................................................................................................... 22 III.3. Short-Run Price Rigidity ........................................................................................................ 24 III.4. The Most-Favored Customer and Low-Price Guarantees....................................................... 26 III.4.1. The Trick and its Competitive Consequences................................................................ 26 III.4.2. Evidence from the Electric Industry.............................................................................. 28 III.5. Extensions to the Most-Favored Customer............................................................................. 31 III.5.1. Returns and Buybacks ...................................................................................................31 III.5.2. Self-Enforcement Mechanisms of Cartels ..................................................................... 34 III.5.3. Raising Rivals’ Costs .................................................................................................... 35 IV. The Manipulative Durapolist: Durability Reduction and Technology Manipulation.........................37 IV.1. A Business Acumen but not Necessarily a Superior Product ................................................. 37 IV.2. Planned Obsolescence: Built-In Durability vs. Variable Durability ....................................... 39 IV.3. Reduced Built-In Durability ................................................................................................... 40 IV.3.1. Policy Considerations ...................................................................................................40 IV.3.2. Some Evidence.............................................................................................................. 43 * Harvard Law School. This paper is based on my thesis paper at Harvard Law School. I am deeply grateful to my supervisor, Louis Kaplow, for comments and suggestions throughout the writing of this paper. I have also received helpful comments from F.M. Scherer, Sam Breen, Ciaran McIntyre, Liran Einav, and Nitsani Chorev. I would also like to thank to David Tadmor for introducing me to the durapolist. -2- IV.4. Reduced Variable Durability .................................................................................................. 50 IV.4.1. Outlook on the Private Costs-Benefits of Variable Durability...................................... 50 IV.4.2. Policy Considerations ...................................................................................................57 IV.4.3. Some Evidence.............................................................................................................. 58 IV.5. Applications: Elimination of Secondhand Markets ................................................................ 62 IV.6. The Presumable Distinctiveness of Planned Obsolescence .................................................... 65 V. The Tying Durapolist: Tying Arrangements ..........................................................................................67 V.1. Tying Durables ............................................................................................................................ 67 V.2. Tying to Overcome the Durapolist Problem................................................................................ 68 V.2.1. Framework of Discussion.............................................................................................. 68 V.2.2. Tying for a Price Discrimination .................................................................................. 71 V.2.3. Tying for a Commitment................................................................................................ 72 V.3. Policy Considerations.................................................................................................................. 73 VI. The Leasing Durapolist: Lease-Only Practices .....................................................................................76 VI.1. Leases and Durable Goods ..................................................................................................... 76 VI.2. The Hypothetical Leasing Durapolist ..................................................................................... 78 VI.3. The Leasing Durapolist at Trial .............................................................................................. 81 VI.4. Policy Considerations ............................................................................................................. 84 VII. Concluding Remarks ................................................................................................................................88 A. Introduction The durapolist1 is an ancient creature in our world and a distinguished member of the monopolists’ family. The durapolist is the durable-good monopolist, a frequent guest in the courtroom, and a favorite subject of study among lawyers and economists following a seven-page note by Professor Ronald Coase.2 Several scholars have argued that the durapolist has a limited market power and, therefore, should not be a concern of antitrust 1 Durapolist is an acronym for a Durable-Good Monopolist. 2 Ronald H. Coase, Durability and Monopoly, 15 J. L. & ECON. 143 (1972). -3- agencies.3 Others have indicated that the durapolist engages in certain practices that assist him in acquiring and maintaining market power. This paper explores the durapolist’s practices and how have they been addressed by the courts, lawyers, and economists. A durable good is a long-lasting good which can be consumed repeatedly. The monopoly over durable-goods markets is durapolists’ invaluable asset. In other markets there are consumable goods (or consumables) that cannot be used more than once, even if they are characterized by longevity, such as canned food and cigarettes are. The markets for consumables may be controlled by the durapolists’ close relatives, the consumable- good monopolists. However, in terms of potential market power, a monopoly over durables is functionally different than a monopoly over consumables and these differences are discussed below. The unique characteristic of the durapolists is that the durability of their goods causes them to be inconsistent over time and as a consequence they cannot charge the static monopoly price. This is the Coase conjecture.4 Historically, however, it is well known that many durapolists had a tremendous market power and, thus, the Coase conjecture presumably poses a puzzle: how do durapolists succeed in overcoming their time-inconsistency problem? Overcoming the durapolist problem is the topic of this paper and specifically the practices and methods that durapolists employ in order to do so. My topic might be 3 Carlton & Gertner [1989]; Froeb [1989]. 4 Professor Coase drew attention to the durapolist’s time inconsistency and hence it has been called after him: Coase conjecture or Coasian dynamics. For a mathematical proof of the Coase conjecture, see: