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Used goods, not used bads: Profitable secondary market sales for a durable goods channel

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  • Jeffrey Shulman

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  • Anne Coughlan

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    Abstract

    The existing literature on channel coordination typically models markets where used goods are not sold, or are sold outside the standard channel. However, retailers routinely sell used goods for a profit in markets like textbooks. Further, such markets are characterized by a renewable consumer population over time, rather than the static consumer population often assumed in prior literature. We show that accounting for these market characteristics alters the optimal contract form as compared to the contracts derived in prior research. In particular, when new goods are sold in both the first and second periods of our model, the optimal contract differs from those in prior literature in that it can exhibit a negative fixed fee in the second period and requires contracting over the resale price in the second period. The model shows that the manufacturer makes higher profits from allowing used-good sales alongside new-good sales than from shutting down the retailer-profitable secondary market, and that unit sales expand with a profitable secondary market over those achievable without a secondary market. Furthermore, in contrast to previous investigations of durable goods markets that ignore the possibility of a retailer-profitable secondary market, we show conditions under which the manufacturer would optimally choose to sell no new goods in the second period, ceding the market entirely to the used-goods retailer. This research thus expands our knowledge of how durable goods markets work by incorporating the profitable operation of a retailer-run resale market. Copyright Springer Science+Business Media, LLC 2007

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    Bibliographic Info

    Article provided by Springer in its journal Quantitative Marketing and Economics.

    Volume (Year): 5 (2007)
    Issue (Month): 2 (June)
    Pages: 191-210

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    Handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:191-210

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    Web page: http://www.springerlink.com/link.asp?id=111240

    Related research

    Keywords: Channels of distribution; Game theory; Durable goods; Used-goods markets; Channel coordination; M31;

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    References

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    1. Nocke, Volker & Peitz, Martin, 2003. "Hyperbolic discounting and secondary markets," Games and Economic Behavior, Elsevier, vol. 44(1), pages 77-97, July.
    2. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 314-32, April.
    3. Liebowitz, S J, 1982. "Durability, Market Structure, and New-Used Goods Models," American Economic Review, American Economic Association, vol. 72(4), pages 816-24, September.
    4. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
    5. Miller, H Laurence, Jr, 1974. "On Killing off the Market for Used Textbooks and the Relationship between Markets for New and Secondhand Goods," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 612-19, May/June.
    6. Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, Econometric Society, vol. 54(1), pages 65-86, January.
    7. J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, INFORMS, vol. 17(2), pages 156-169.
    8. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, INFORMS, vol. 2(2), pages 161-191.
    9. Devavrat Purohit, 1997. "Dual Distribution Channels: The Competition Between Rental Agencies and Dealers," Marketing Science, INFORMS, INFORMS, vol. 16(3), pages 228-245.
    10. G.F. Mathewson & R.A. Winter, 1984. "An Economic Theory of Vertical Restraints," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 27-38, Spring.
    11. Conlisk, John & Gerstner, Eitan & Sobel, Joel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(3), pages 489-505, August.
    12. Preyas Desai & Oded Koenigsberg & Devavrat Purohit, 2004. "Strategic Decentralization and Channel Coordination," Quantitative Marketing and Economics, Springer, Springer, vol. 2(1), pages 5-22, 03.
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