Two-Part Tariff and Aftermarket Duopoly: An Illustration

The authors shed light on the original equipment manufacturer's strategic behavior in the duopoly aftermarket. The original equipment manufacturer, firm 1, captures via its foremarket price some fraction of the aftermarket consumer surplus, where that surplus is generated by consumption of its own and its competitor's aftermarket products. The other firm, firm 2, only operates in the aftermarket and does not capture any of the aftermarket consumer surplus. Assuming a Cournot or Stackelberg duopoly aftermarket with firm 1 as the quantity leader, we find the conditions under which firm 1's aftermarket price is above or below its marginal cost; the conditions under which firm 1's profit falls or increases when firm 2 adds value to its aftermarket product or lowers its marginal cost; and the conditions under which firm 1 is less profitable or more profitable in sharing the aftermarket than it would be alone.