Independent Service Organizations and Economic Efficiency

Abstract

Following the Supreme Court's Kodak decision, numerous antitrust cases have revolved around practices of manufacturers which deter independent service organizations (ISOs) from servicing the manufacturer's equipment. Such practices include tying equipment sales to service, tying service sales to other “aftermarket” products, and refusing to sell replacement parts to ISOs. We show that interbrand systems competition without ISOs curbs service and equipment price distortions and, under plausible conditions, confers greater benefits to users of durable equipment than intrabrand service competition with ISOs. Hence, the effect of manufacturers' practices that foreclose ISOs from service aftermarkets can be efficiency promoting rather than anticompetitive.