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New Market Policy Effects on Used Markets: Theory and Evidence

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  • Smith Loren K.

    ()
    (Federal Trade Commission)

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    Abstract

    Because of linkages between markets for new and used durable goods, economic policies that target new durable good markets, such as tax incentives or antitrust legislation, are likely to affect used goods markets as well. I use a simple theoretical model to illustrate how an exogenous shock to prices of new durable goods affects prices and trade frequencies of corresponding used goods. The model predicts that if prices of new durable goods increase, then prices of used goods will also increase. In addition, if the distribution of consumer preferences for quality are relatively concentrated among those with a high preference for quality, then trade in used good markets will slow. The predictions of the model are supported by an empirical analysis of the market for new and used wide-body commercial aircraft following a major change in effective aircraft prices caused by the Tax Reform Act of 1986. The Act effectively increased prices of new aircraft by an average of $6.5 million. At the same time, used aircraft prices increased by an average of $2.9 million to $7.7 million and used aircraft sales fell between 23 to 36 percent. These results suggest that policies that affect new durable good markets can have significant effects on used markets as well.

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    Bibliographic Info

    Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

    Volume (Year): 9 (2009)
    Issue (Month): 1 (July)
    Pages: 1-27

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    Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:32

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    Web page: http://www.degruyter.com

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    Web: http://www.degruyter.com/view/j/bejeap

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    Cited by:
    1. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 397-402, July.

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