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Digital Distribution and the Prohibition of Resale Markets for Information Goods

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  • Benjamin Reed Shiller

    ()
    (Economics Department, Brandeis University)

Abstract

An existing theoretical literature finds that frictionless resale markets cannot reduce profits of monopolist producers of perfectly durable goods. This paper starts by presenting logical arguments suggesting this finding does not hold for goods consumers tire of with use, implying the impact of resale is an empirical question. The empirical impact is then estimated in the market for video games, one of many markets in which producers may soon legally prevent resale by distributing their products digitally as downloads or streamed rentals. Estimation proceeds in two steps. First, demand parameters are estimated using a dynamic discrete choice model in a market with allowed resale, using data on new sales and used trade- ins. Then, using these parameter estimates, prices, profits, and consumer welfare are simulated under counterfactual environments. When resale is allowed, firms are unable to prevent their goods from selling for low prices in later periods. The ability to do so by restricting resale outright yields significant profit increases. Renting, however, does not raise profits as much due to a revenue extraction problem.

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File URL: http://www.brandeis.edu/departments/economics/RePEc/brd/doc/Brandeis_WP59.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Brandeis University, Department of Economics and International Businesss School in its series Working Papers with number 59.

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Length: 38 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:brd:wpaper:59

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Postal: MS032, P.O. Box 9110, Waltham, MA 02454-9110
Web page: http://www.brandeis.edu/departments/economics/
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  1. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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  7. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-30, January.
  8. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  9. Jiawei Chen & Susanna Esteban & Matthew Shum, 2010. "How much competition is a secondary market?," Working Papers 2010-06, Instituto MadrileƱo de Estudios Avanzados (IMDEA) Ciencias Sociales.
  10. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
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