*This paper was previously circulated under the title ‘Bundling, Compatibility and Upgrades.’ I am grateful to Michael Waldman, Drew Fudenberg, Marie Goppelsroeder, seminar participants at the University of South Carolina and the 2007 International Industrial Organization Conference, two anonymous referees and the Editor for helpful comments and suggestions. All remaining errors are mine.
TYING, COMPATIBILITY AND PLANNED OBSOLESCENCE*
Article first published online: 3 SEP 2010
© 2010 The Author. The Journal of Industrial Economics © 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics
The Journal of Industrial Economics
Volume 58, Issue 3, pages 579–606, September 2010
How to Cite
MIAO, C.-H. (2010), TYING, COMPATIBILITY AND PLANNED OBSOLESCENCE. The Journal of Industrial Economics, 58: 579–606. doi: 10.1111/j.1467-6451.2010.00425.x
- Issue published online: 3 SEP 2010
- Article first published online: 3 SEP 2010
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.