Impact of Electronic Secondary Markets on Information Goods Suppliers

Abstract

We develop an analytical framework to investigate the competitive implications of electronic secondary markets which promote concurrent selling of new and used goods. In secondary markets where suppliers cannot directly use second-hand goods for practicing inter-temporal price discrimination, the threat of cannibalization of new goods by used goods become significant. We examine conditions under which it is optimal for suppliers to operate in such markets, explaining why these markets may not always be a threat to suppliers. Intuitively, secondary markets provide an active outlet for some consumers to sell their second-hand (used) goods. Such sales lead to an increase in their valuation for the new good due to the potential for an increase in the disposable income from resale. This increased valuation leads them to to buy an additional new good. Thus the “income effect” can mitigate the losses incurred by suppliers from the direct “cannibalization effect” in the presence of secondary markets. We highlight the strategic role which used goods commission set by the retailer plays in determining profits for suppliers. Contrary to conventional wisdom, our model predicts the reduction in the price of new goods with an increase in the availability of used goods. Further, we show that as the used good price increases, the new good price also increases. We conclude the paper by empirically testing some implications of our model using data from the online book industry.