Internet Exchanges for Used Books: An Empirical Analysis of Welfare Implications

Abstract

Information technology-enabled exchanges have enhanced the viability of a variety of secondary markets, notably markets for used books. Electronic used book exchanges, in particular, offer a wider selection, lower search costs, and significantly lower prices than physical used bookstores do. The increased viability of these used book markets has caused concern among groups such as the Book Publishers Association and Author’s Guild who believe that used book markets will significantly cannibalize new book sales.

This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this research, we use a unique dataset collected from Amazon.com’s new and used marketplaces to estimate the impact of IT-enabled used book markets on new book sales. We use these data to calculate the impact of these secondary market exchanges on consumer and publisher welfare by calculating the cross-price elasticity of new books sales with respect to used book prices.

Our analysis suggests that IT-enabled secondary market exchanges increase consumer surplus by approximately $70 million annually. Further, we find that only 15% of used book sales at Amazon cannibalize new book purchases. The remaining 85% of used book sales apparently would not have occurred at Amazon’s new book prices. This low cannibalization means that book publishers lose only $32 million in gross profit annually (about 0.2% of total gross profit) due to the presence of Amazon’s used book markets. Further, the additional used book readership gain from these electronic markets may mitigate author losses through increased revenue from secondary sources such as speaking and licensing fees. These surplus changes, combined with the estimated $64 million the used book market added to Amazon’s gross profits, show that IT-enabled used markets for books have a strong positive first-order impact on total welfare.