The pricing, provisioning, and tying of new technologies

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Gaynor, Daniel Edward

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The economics literature has traditionally focused on anticompetitive incentives to explain why firms are motivated to bundle products. Yet these theories cannot always provide adequate explanations for firms’ bundling practices. Chapter Two studies non-exclusionary bundling of an add-on product with a core (or basic) product sold by a monopolist and finds that bundling can occur simply because sales of the products cannot be separated. Chapter Two also considers the case in which vertically non-integrated monopolists produce the individual products and finds that dual monopolists are more likely to price in such a way that all consumers buying the core good also buy the add-on than would arise with a single firm. When a monopolist designs a product so that it functions only when used in conjunction with its own complementary products, the firm has engaged in technological tying. For example, a camera system producer introducing a new camera body that will only work with its own line of lenses has technologically tied its lenses with its camera body. In cases where a technological tie artificially closes an inherently open system, the tying behavior may be subject to antitrust scrutiny. In Chapter Three, I explore a firm’s incentives to tie technologically, the effects of a technological tie on the firm’s decision to innovate, and ultimately how consumers are affected by such tying behavior. Finally, in Chapter Four, I investigate how secondary markets affect the frequency with which a monopolist will offer new technologies to consumers. While the majority of the existing literature dealing with secondary markets focuses on products that physically depreciate, little research exists addressing the secondary market for durable goods that experience technological, rather than physical, obsolescence. This paper focuses on such markets where technological obsolescence exceeds physical obsolescence and finds that a monopolist will innovate more frequently, yet earn fewer profits, when it must compete with a market for used goods.