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Tying, Compatibility and Planned Obsolescence

Miao, Chun-Hui (2008): Tying, Compatibility and Planned Obsolescence. Forthcoming in: Journal of Industrial Economics

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Abstract

According to the hypothesis of planned obsolescence, a durable goods monopolist without commitment power has an excessive incentive to introduce new products that make old units obsolete, and this reduces its overall profitability. In this paper, I reconsider the above hypothesis by examining the role of competition in a monopolist's upgrade decision. I find that, when a system add-on is competitively supplied, a monopolist chooses to tie the add-on to a new system that is only backward compatible, even if a commitment of not introducing the new system is available and socially optimal. Tying facilitates a price squeeze.

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