Aftermarket Competition and Exclusionary Practices

Exclusivity and OEM practices can shape market competition, influencing pricing, access, and consumer choice. Economic analysis helps uncover how these strategies impact competition and overall welfare.

Aftermarket competition refers to competition in the market for parts, services, or accessories that support a product already sold by an Original Equipment Manufacturer (OEM). This competition is essential for consumer choice and fair pricing. However, OEMs often use exclusionary practices limit competition.

This first of five articles will explain (a) what exclusionary practices are, (b) the difference between foremarkets and aftermarkets, and (c) how exclusionary practices may help or harm competition in aftermarkets.

Key Takeaways

Exclusivity clauses can provide firms with competitive advantages but may limit flexibility and consumer choices in the market.
OEM exclusionary practices, including tying, restrictive warranties, and exclusivity agreements, significantly impede aftermarket competition and can lead to increased prices and reduced consumer welfare.
Economic analysis is vital in evaluating the impact of OEM exclusionary practices, helping to identify market dynamics and assess potential damages.

Exclusionary Practices That Are Relevant to Aftermarkets

Exclusionary practices are strategies employed by OEMs to limit or exclude competition in the aftermarket. These practices may include (i) exclusivity agreements or clauses, (ii) restrictive warranties, and (iii) tying.

(i) Exclusivity Agreements or Clauses

Exclusivity agreements or clauses are contract provisions that require one party to deal only with the other party (or to refrain from dealing with competitors) with respect to a defined product, service, territory, or customer group for a specified period. They can take many forms—exclusive supply or purchase obligations, exclusive distribution or licensing rights, or promises by an employee or contractor not to provide the same services elsewhere—and typically specify scope, duration, geographic limits, performance requirements, and remedies for breach. While exclusivity can protect investments, encourage marketing support, and secure predictable demand, overly broad or indefinite exclusivity may create competitive harm that sparks antitrust concerns.

(ii) Restrictive Warranties

Restrictive warranties are warranty terms that condition warranty coverage on buyers using only the seller’s designated parts, services, or distribution channels, or that limit downstream resale or use. For example, voiding the warranty if third-party parts are installed or independent repairs are performed. In some situations, these can be justified due to legitimate concerns like safety, quality control, or IP protection. However, in other situations they can potentially be anticompetitive because they effectively lock customers into the supplier’s aftermarket, raise rivals’ costs or exclude them from the market, reduce consumer choice, and create barriers to entry for independent service providers and parts makers. By tying warranty benefits to exclusive purchases or authorized-channel use, such clauses can convert a firm’s market power in one product into foreclosed share and higher prices in complementary markets (an “aftermarket” or service market), and may attract antitrust scrutiny when they unreasonably restrain competition or lack a procompetitive justification.

(iii) Tying

Tying occurs when a seller makes the purchase of one product (the “tying” product) conditional on the buyer also purchasing a separate product (the “tied” product), or effectively bundles the two so customers cannot obtain the first without the second. Examples include requiring customers who buy a printer to use only the manufacturer’s ink, or selling a software platform only if the buyer also takes a proprietary add-on. Tying can be procompetitive when it produces efficiencies—improving integration and interoperability, ensuring safety or quality, lowering transaction or search costs, enabling economies of scale, or facilitating investment in complementary innovation—because the combined offer can deliver greater value than the parts sold separately. It can become anticompetitive when a firm with market power in the tying product uses the tie to foreclose rivals in the tied market, coerce customers, raise rivals’ costs, limit substitution, or exclude entry, thereby harming consumer choice and raising prices.

What Is The Difference Between Aftermarkets and Foremarkets?

To better understand the markets for certain interrelated products, economists may divide them into foremarkets and aftermarkets.

A foremarket refers to the market for a durable, long-lived product, typically produced by . Original Equipment Manufacturers (OEMs).

Aftermarkets are the markets for parts, services, or accessories that support a product already sold by an OEM. While OEMs are the sole producers in the foremarket, competition in the aftermarket may come from third-party companies, the OEM itself, and even customers who perform their own maintenance or repairs.

What Are Factors Affecting Aftermarket Competition?

Competition can play a crucial role in ensuring that consumers have access to a variety of options for aftermarket products and/or services. The degree of aftermarket competition is influenced by several factors. For example:

First, there must be sufficient demand to entice competitors to enter the market. Popular foremarket products often attract numerous third-party aftermarket competitors. In contrast, less widely used foremarket products may not be able to support additional aftermarket competitors.
Second, there may be significant technical or regulatory barriers which dissuade third parties from entering the market. Even a moderate level of demand may not attract competitors if the cost of entry is too high.
Third, contractual or other restrictions can significantly impact competition. Some OEMs may foster a competitive aftermarket by sharing product details and specifications, while others withhold this information to limit third party participation and strengthen their control over the aftermarket.

Understanding these dynamics is essential for grasping the broader implications of OEM exclusionary practices.

The Potential Economic Harms of Exclusionary Practices

Exclusionary practices by OEMs can have significant economic effects. Potential effects may include (1) higher prices, (2 lower quality, (3) reduced consumer choice, and (4) stifled innovation.

First, exclusion can lead to higher prices. By foreclosing competitors or insulating an incumbent from rivals, firms can inflate prices, reduce discounts, and/or pass higher input costs downstream causing end consumers to pay more.

Second, these practices tend to lower quality. With less competitive pressure, firms have weaker incentives to maintain high manufacturing standards, prompt service, or regular product improvements, and they may cut corners where oversight is reduced.

Third, exclusion reduces consumer choice. Locked distribution channels and conditioned warranties shrink the set of available brands, niche offerings, and independent service options, so consumers face fewer alternatives.

Finally, exclusion often stifles innovation. Barriers to entry and blocked access for competitors or independent suppliers can reduce the experimentation, feedback, and scaling that drive technological progress, slowing long-run productivity and concentrating market power.

Potential Economic Benefits of Exclusionary Practices

While exclusionary practices often harm competition, there may be situations where excluding competition can be beneficial to consumers. This is the case when normal competition is corrupted.

For example, if the sources of aftermarket products are not clearly labeled then customers may misattribute a low-quality third-party aftermarket product with the OEM’s brand. In that situation, it may be beneficial to exclude from the market low-quality producers.

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Examples of Legal Precedents in Aftermarket Exclusionary Competition Cases

Supreme court cases have addressed ways in which anticompetitive conduct can occur in aftermarkets. For example:

Hanover Shoe Machinery Co. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).

United leased shoe-machinery with service “bundled” at no separate charge under long-term contracts. The Court found this effectively tied parts and service to its patented machines, foreclosing competitors in the parts/service aftermarket.

Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992).

Kodak is the monopoly provider of service for its photocopiers. Kodak stopped supplying parts to independent servicers, exploiting existing photocopy machine owners who were forced to pay higher prices because they were “locked in” to their Kodak machine. The Court found that, even if Kodak didn’t have market power in the foremarket for photocopiers, its aftermarket exclusionary conduct could be unlawful.

Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. 140 (2017).

Lexmark’s post-sale restrictions on refurbishing and importing its toner cartridges were held unenforceable under patent law. The Court ruled that a domestic or foreign sale exhausts all patent rights, freeing downstream aftermarket competition.

The Benefit of Collaborating with Economic Experts Early On

Collaborating with an economic expert at two early stages has many benefits.

At the first stage, prior to filing a case, economists can help gather public data and “stress-test” your theories of competition and/or damages. At the second stage, in discovery, economic experts help ensure that all necessary information is gathered to address liability and damage issues.

Resumen

OEM exclusionary practices in aftermarkets can have significant economic consequences. These include higher prices, reduced consumer choice, and stifled innovation. Because there may be scenarios where these practices have procompetitive effects, a comprehensive analysis is essential to weigh the overall impact on markets and consumers.

Understanding the role of economic analysis and the importance of collaborating with economic experts is crucial for addressing these complex issues. By examining legal and economic precedents and evaluating the specific details of each case, we can better understand the broader implications of OEM exclusionary practices. This would allow us to work towards promoting a more competitive and fair marketplace.

The opinions and statements contained in this post are those of the author or source and do not necessarily reflect the views of Econ One or its affiliates. This material is provided “as is” for general informational purposes only and does not constitute professional advice. Econ One disclaims all liability for any reliance placed on the information contained herein.