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Trade-ins and Transaction Costs in the Market for Used Business Jets

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  • Charles Hodgson

Abstract

Manufacturers of durable goods can encourage consumers facing transaction costs to upgrade by accepting used units as trade-ins. These “buyback schemes” increase demand for new units, but increase the supply of used units if trade-ins are resold. In this paper, I investigate the equilibrium effects of buyback schemes in the market for business jets. I find that buyback increases demand for new units by 37% at fixed prices. However, in equilibrium this increase in sales is diminished by 38% due to substitution away from new jets among first time buyers. Because of this cannibalization, offering buyback is a dominant strategy for only 3 of the 6 major firms, with 3 firms offering buyback as a best response to other firms’ policies. I show that equilibrium buyback policies can change under counterfactual market structures: a simulated merger leads to a reduction in consumer welfare, 70% of which is due to a change in buyback policy.

Suggested Citation

  • Charles Hodgson, 2022. "Trade-ins and Transaction Costs in the Market for Used Business Jets," NBER Working Papers 30497, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30497
    Note: IO
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    Cited by:

    1. Corey J.M. Williams & Kole Reddig & Adam Nowak, "undated". "Collectible Pricing and Collector Utility: The Role of Production Commitments," Working Papers 24-03, Department of Economics, West Virginia University.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation

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