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New Market Policy Effects on Used Markets: Theory and Evidence


  • Smith Loren K.

    () (Federal Trade Commission)


Because of linkages between markets for new and used durable goods, economic policies that target new durable good markets, such as tax incentives or antitrust legislation, are likely to affect used goods markets as well. I use a simple theoretical model to illustrate how an exogenous shock to prices of new durable goods affects prices and trade frequencies of corresponding used goods. The model predicts that if prices of new durable goods increase, then prices of used goods will also increase. In addition, if the distribution of consumer preferences for quality are relatively concentrated among those with a high preference for quality, then trade in used good markets will slow. The predictions of the model are supported by an empirical analysis of the market for new and used wide-body commercial aircraft following a major change in effective aircraft prices caused by the Tax Reform Act of 1986. The Act effectively increased prices of new aircraft by an average of $6.5 million. At the same time, used aircraft prices increased by an average of $2.9 million to $7.7 million and used aircraft sales fell between 23 to 36 percent. These results suggest that policies that affect new durable good markets can have significant effects on used markets as well.

Suggested Citation

  • Smith Loren K., 2009. "New Market Policy Effects on Used Markets: Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-27, July.
  • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:32

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    References listed on IDEAS

    1. Rust, John, 1985. "Stationary Equilibrium in a Market for Durable Assets," Econometrica, Econometric Society, vol. 53(4), pages 783-805, July.
    2. Fullerton, Don, 1987. "The indexation of interest, depreciation, and capital gains and tax reform in the United States," Journal of Public Economics, Elsevier, vol. 32(1), pages 25-51, February.
    3. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-962, November.
    4. Konishi, Hideo & Sandfort, Michael T., 2002. "Existence of stationary equilibrium in the markets for new and used durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 1029-1052, June.
    5. Anderson, Simon P. & Ginsburgh, Victor A., 1994. "Price discrimination via second-hand markets," European Economic Review, Elsevier, vol. 38(1), pages 23-44, January.
    6. Peter L. Swan, 1971. "The Durability of Goods and Regulation of Monopoly," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 347-357, Spring.
    7. Alan J. Auerbach & Joel Slemrod, 1997. "The Economic Effects of the Tax Reform Act of 1986," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 589-632, June.
    8. Lyon, Andrew B., 1989. "The effect of the investment tax credit on the value of the firm," Journal of Public Economics, Elsevier, vol. 38(2), pages 227-247, March.
    9. Auerbach, Alan J, 1987. "The Tax Reform Act of 1986 and the Cost of Capital," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 73-86, Summer.
    10. Cutler, David M, 1988. "Tax Reform and the Stock Market: An Asset Price Approach," American Economic Review, American Economic Association, vol. 78(5), pages 1107-1117, December.
    11. Swan, Peter L, 1972. "Optimum Durability, Second-Hand Markets, and Planned Obsolescence," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 575-585, May-June.
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    Cited by:

    1. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 397-402, July.
    2. repec:bla:irvfin:v:17:y:2017:i:1:p:147-154 is not listed on IDEAS

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