When Does Aftermarket Monopolization Soften Foremarket Competition?

This paper investigates firms' abilities to collude when these firms each monopolize a proprietary aftermarket. When firms' aftermarkets are isolated from foremarket competition, they cannot tacitly collude more easily than single product firms do. However, when their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm's aftermarket product, the monopoly profit is sustainable among a larger number of firms. More strikingly, as long as existing customers have a shorter market life expectancy than incoming customers, for any discount factor, supranormal profits are sustainable among arbitrarily many firms each selling ex ante identical products. These results suggest the importance of distinguishing between two types of aftermarket power which are often considered to be qualitatively the same. Conditions under which introduction of aftermarket competition hinders firms' ability to tacitly collude are characterized.