In many economic literature, the term "aftermarket" refers to a secondary market for the goods and services that are 1) complementary or 2) related to its primary market goods (original equipment).
Thus, in many industries, the primary market consists of durable goods, whereas the aftermarket consists of consumable or non-durable products or services.
Accordingly, the "aftermarket goods" mainly include products and services for replacement parts, upgrade, maintenance and enhancement of the use of its original equipment.
A certain level of installed base of original equipment customers is necessary for the sufficient demand of aftermarket products.
Therefore, significant installed base normally makes aftermarket profitable as an established installed base is likely to consume the aftermarket products repeatedly over the lifespan of their durable goods.
Often the durable goods are offered at a low price (or even below marginal cost) in order to attract new customers amid competitive primary markets and the loss from the primary market will be rebated by the profits from consumables in aftermarket.
In this case, an established installed base is essential to ensure sustainable business practice.
Tying or bundling of aftermarket products with original equipment also could be the strategies for aftermarket.
Inkjet printers and toner cartridges are well-known examples of original equipment and their aftermarket products. Many inkjet printer manufacturers employ technology which renders their printers compatible only with printer cartridges they also manufacture in order to increase their aftermarket profits.[a]
Many mobile network carriers offers contracts by which consumers could get a mobile phone device for a lower price or even free in exchange for long-term network service contract.[b]
Some automobiles only could be fixed by the specially trained engineers from the company manufacturing those cars.[c]
The primary market and its aftermarket should be considered as a single joint market since they are to a large extent related; unless both primary and aftermarket are monopolized, there will be no anti-competitive impact in monopolizing either of them.
Consumers are rational and farsighted. They can accurately reckon the whole lifecycle cost of a product including original equipment and aftermarket costs; a supplier is not able to charge supra-competitive prices in the aftermarket or
Even if the supplier is able to charge supra-competitive prices in the aftermarket, these profits should be employed to lower the price of the original equipment in order to attract consumers in its primary market.
In addition, the Chicago school argues that Aftermarket monopolization enables manufacturers to afford investments into quality improvement of their original equipment; consumers may benefit from quality primary goods for lower price and overall economic efficiency therefore increases.
The post-Chicago school
In contrast to the Chicago school, the post-Chicago school asserts that the monopolization in the aftermarket could harm consumer welfare as following reasons:
The profits from the increase in prices in the monopolized aftermarket tend to outweigh the loss from the decrease in new sales in the primary market competition; exploiting installed base might be more profitable than competing in the primary market
Moreover, high switching costs of primary goods worsen the lock-in effect; monopolists have more incentives to exploit the locked-in customers with the supra-competitive pricing
Customers are not always farsighted, but myopic; they are highly focusing on the upfront costs of original equipment which allows manufacturers to exploit them by the supra-comeptitive pricing in the aftermarket
In addition, the post Chicago economists argue that the primary market where the investments costs in original equipment are largely subsidized by the profits from its monopolized aftermarket tend to be anti-competitive as entry into a market will be difficult without installed base.
Although Chicago school economists assumes that theoretically consumers are farsighted and rational, the results of a number of empirical economic literature insist that consumers are in many cases highly myopic towards the sophisticated choices.
Thus, it has been consented now that aftermarket monopolization has potential harms even when consumers are fully informed about the whole lifecycle costs with the competitive primary market.
Following is a list of factors making aftermarket monopolization more harmful.
High switching cost of original equipment (primary goods)
Lack of complete contracts (unclear)
A large number of uninformed customers (exploitable installed base)
Low quality information (validity)
Large aftermarket (large installed base)
High proportion of locked-in customers relative to new customers (also large installed base)
Weak competition on the primary market (easy to maximise profits)
High discount rate (incentive to exploit the installed base in order to set-off the loss from discount on primary goods)
The razor and blades business model is a business model wherein one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as consumable supplies. For example, inkjet printers require ink cartridges, and game consoles require accessories and software. It is distinct from loss leader marketing and free sample marketing, which do not depend on complementary products or services.
Although the concept and its proverbial example "Give 'em the razor; sell 'em the blades" are widely credited to King Camp Gillette, the inventor of the disposable safety razor and founder of Gillette Safety Razor Company, Gillette did not originate this model.
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