Used goods, not used bads: Profitable secondary market sales for a durable goods channel
AbstractThe 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
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Springer in its journal Quantitative Marketing and Economics.
Volume (Year): 5 (2007)
Issue (Month): 2 (June)
Contact details of provider:
Web page: http://www.springerlink.com/link.asp?id=111240
Channels of distribution; Game theory; Durable goods; Used-goods markets; Channel coordination; M31;
Find related papers by JEL classification:
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Volker Nocke & Martin Peitz, 2002.
"Hyperbolic Discounting and Secondary Markets,"
Economics Series Working Papers
2001-W17, University of Oxford, Department of Economics.
- Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
- Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
- 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, vol. 82(3), pages 612-19, May/June.
- Preyas Desai & Oded Koenigsberg & Devavrat Purohit, 2004. "Strategic Decentralization and Channel Coordination," Quantitative Marketing and Economics, Springer, vol. 2(1), pages 5-22, 03.
- Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, vol. 54(1), pages 65-86, January.
- Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
- J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, vol. 17(2), pages 156-169.
- Conlisk, John & Gerstner, Eitan & Sobel, Joel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 489-505, August.
- Devavrat Purohit, 1997. "Dual Distribution Channels: The Competition Between Rental Agencies and Dealers," Marketing Science, INFORMS, vol. 16(3), pages 228-245.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.