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Patterns of Trade in the Market for Used Durables: Theory and Evidence

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  • Robert H. Porter
  • Peter Sattler

Abstract

The consumption value of a durable good diminishes as it ages due to physical deterioration and consumers' preference for the new. We develop a model of consumer specialization and trade in the market for used durables based on imperfect substitutability. Imperfect substitutability across vintages is reflected in a declining market price over time. Heterogeneous consumers maximize utility by specializing in durables of differing ages. Consumers must trade to acquire their preferred vintage each period. When there are transaction costs in the secondhand market, the volume of trade due to specialization increases with imperfect substitutability. We examine the determinants of vehicle ownership transfers in Illinois, a measure of trade volume. Observed patterns of trade across automobile model years are consistent with our model, and inconsistent with a model of adverse selection.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7149.

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Date of creation: May 1999
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Publication status: published as With Kenneth Hendricks, published as "Bidding Behaviour in OCS Drainage Auctions: Theory and Evidence", European Economic Review, Vol. 37, nos. 2/3 (1993): 320-328.
Handle: RePEc:nbr:nberwo:7149

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  1. Bond, Eric W, 1982. "A Direct Test of the "Lemons" Model: The Market for Used Pickup Trucks," American Economic Review, American Economic Association, American Economic Association, vol. 72(4), pages 836-40, September.
  2. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 273-83, February.
  3. Igal Hendel & Alessandro Lizzeri, 1997. "Adverse Selection in Durable Goods Markets," NBER Working Papers 6194, National Bureau of Economic Research, Inc.
  4. Varian, Hal R, 2000. "Buying, Sharing and Renting Information Goods," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 48(4), pages 473-88, December.
  5. 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.
  6. Devavrat Purohit, 1992. "Exploring the Relationship Between the Markets for New and Used Durable Goods: The Case of Automobiles," Marketing Science, INFORMS, INFORMS, vol. 11(2), pages 154-167.
  7. Bruce W Hamilton & Molly Macauley, 1996. "Competition and Car Longevity," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 361, The Johns Hopkins University,Department of Economics.
  8. Genesove, David, 1993. "Adverse Selection in the Wholesale Used Car Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(4), pages 644-65, August.
  9. Benjamin, Daniel K & Kormendi, Roger C, 1974. "The Interrelationship between Markets for New and Used Durable Goods," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 17(2), pages 381-401, October.
  10. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 84(3), pages 488-500, August.
  11. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 40(1), pages 61-92, April.
  12. Liebowitz, S J, 1982. "Durability, Market Structure, and New-Used Goods Models," American Economic Review, American Economic Association, American Economic Association, vol. 72(4), pages 816-24, September.
  13. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 143-49, April.
  14. 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.
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Cited by:
  1. Pasquale Schiraldi, 2006. "Second-Hand Markets and Collusion by Manufacturers of Semidurable Goods," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2006-028, Boston University - Department of Economics.
  2. Nikita Roketskiy & Alessandro Lizzeri & Alessandro Gavazza, 2012. "A Quantitative Analysis of the Used Car Market," 2012 Meeting Papers, Society for Economic Dynamics 173, Society for Economic Dynamics.
  3. Pasquale Schiraldi, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 21780, London School of Economics and Political Science, LSE Library.
  4. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(4), pages 397-402, July.
  5. Bruce A. Blonigen & Christopher R. Knittel & Anson Soderbery, 2013. "Keeping it Fresh: Strategic Product Redesigns and Welfare," NBER Working Papers 18997, National Bureau of Economic Research, Inc.
  6. Eisfeldt, Andrea L. & Rampini, Adriano A., 2007. "New or used? Investment with credit constraints," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2656-2681, November.
  7. Engers, Maxim & Hartmann, Monica & Stern, Steven, 2009. "Are lemons really hot potatoes?," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 27(2), pages 250-263, March.
  8. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(1), pages 131-154, Winter.
  9. Clerides, Sofronis & Hadjiyiannis, Costas, 2008. "Quality standards for used durables: An indirect subsidy?," Journal of International Economics, Elsevier, Elsevier, vol. 75(2), pages 268-282, July.
  10. Clerides, Sofronis, 2005. "Gains From Trade in Used Goods: Evidence from the Global Market for Automobiles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4859, C.E.P.R. Discussion Papers.
  11. Maxim Engers & Monica Hartmann & Steven Stern, 2009. "Annual miles drive used car prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(1), pages 1-33.
  12. Antonio R. Sampayo & Luis A. Puch & Omar Licandro, 2006. "Secondhand market and the lifetime of durable goods," Working Papers 2006-10, FEDEA.
  13. Aronsson, Thomas & Sjögren, Tomas & Witterblad, Mikael, 2008. "Optimal Taxation and Asymmetric Information in an Economy with Second-Hand Trade," UmeÃ¥ Economic Studies, UmeÃ¥ University, Department of Economics 732, Umeå University, Department of Economics.
  14. Kumar, Praveen, 2002. "Price and quality discrimination in durable goods monopoly with resale trading," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 20(9), pages 1313-1339, November.

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