New Chips Can Keep a Tight Rein on Consumers
¶Some inkjet printers have chips in their ink cartridges that prevent operation if the cartridge has been refilled.

¶Cellphones sometimes come with chips in their batteries that prevent operation if the battery isn't the right brand.

¶Compact discs can have copy-protection systems that keep them from being played in personal computer drives.

Until recently, the after-purchase use of a product has been crudely controlled via contracts, licensing or mechanical design, but now it can easily be controlled through chips and cryptography.

What are the economic implications of technologies that can control after-purchase use? The answer depends on how competitive the markets are. Take the inkjet printer market. If cartridges have a high profit margin but the market for printers is competitive, competition will push down the price of printers to compensate for the high-priced cartridges. Restricting after-purchase use makes the monopoly in cartridges stronger (since it inhibits refills), but that just makes sellers compete more intensely to sell printers, leading to lower prices in that market. This is just the old story of "give away the razor and sell the blades."

But if the industry supplying the products isn't very competitive, then controlling after-purchase behavior can be used to extend a monopoly from one market to another. The markets for software operating systems and for music and video content are highly concentrated, so partnerships between these two industries should be viewed with suspicion…

But there is another set of problems associated with controlling after-purchase use: these technologies can reduce innovation.
http://www.nytimes.com/2002/07/04/business/04SCEN.html