Understanding the Role of Trade-Ins in Durable Goods Markets: Theory and Evidence
The act of trading in a used car as partial payment for a new car resonates with practically all consumers. Such transactions are prevalent in many other durable goods markets, ranging from golf clubs to CT scanners. What roles do trade-ins play in these markets? What motivates the seller to set up a channel to facilitate trade-ins? Intuitively, accepting a trade-in would appear to stimulate demand for the producer's product, but facilitating the resale of these used goods that substitute for new goods might also increase cannibalization. Although such transactions involve billions of dollars, we know relatively little about this practice from the extant research literature. This paper develops an analytical model that incorporates key features of real-world durable goods markets: (i) coexistence of new and used goods markets, (ii) consumer heterogeneity with respect to quality sensitivity, (iii) firms that anticipate the cannibalization problem arising from the coexistence of new and used goods, and (iv) lemon problems in resale markets, whereby sellers of used goods are better informed than buyers about the quality of their particular item. In our analysis, a trade-in policy amounts to an intervention by the firm in the used goods market, which reduces inefficiencies arising from the lemon problem. It motivates owners to purchase new goods and reduces their proclivity to hold on to purchased goods because of the low price the latter would fetch in a lemon market. We also show that trade-in programs are more valuable for less reliable products, as well as for products that deteriorate more slowly. Our analysis shows that producers in durable goods markets should consider trade-in programs as a matter of routine. Despite cannibalization concerns arising from a more active resale market, a producer's profits will inevitably rise from introducing trade-ins, given pervasive lemon problems. We test the key predictions of the model about price and volume of trade by assembling a data set of transactions of U.S. automobile consumers and find broad support for our model.
Volume (Year): 28 (2009)
Issue (Month): 5 (09-10)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
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.:
- Ann van Ackere & Diane J. Reyniers, 1995. "Trade-ins and Introductory Offers in a Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 58-74, Spring.
- Adda, Jérôme & Cooper, Russell W., 1997.
"Balladurette and jupette: a discrete analysis of scrapping subsidies,"
CEPREMAP Working Papers (Couverture Orange)
- Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
- Jerome Adda & Russell Cooper, 1997. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," NBER Working Papers 6048, National Bureau of Economic Research, Inc.
- Jerome Adda & Russell Cooper, 1997. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Papers 0076, Boston University - Industry Studies Programme.
- Anderson, Simon P. & Ginsburgh, Victor A., 1994.
"Price discrimination via second-hand markets,"
European Economic Review,
Elsevier, vol. 38(1), pages 23-44, January.
- ANDERSON, Simon P. & GINSBURGH, Victor A., . "Price discrimination via second-hand markets," CORE Discussion Papers RP 1078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Simon P. Anderson & Victor Ginsburgh, 1994. "Price discrimination via second-hand markets," ULB Institutional Repository 2013/1719, ULB -- Universite Libre de Bruxelles.
- Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
- Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
- Adam Copeland & Wendy E. Dunn & George J. Hall, 2005.
"Prices, production, and inventories over the automotive model year,"
Finance and Economics Discussion Series
2005-25, Board of Governors of the Federal Reserve System (U.S.).
- Copeland, Adam & Hall, George J., 2005. "Prices, Production and Inventories over the Automotive Model Year," Working Papers 2, Yale University, Department of Economics.
- George Hall & Adam Copeland & Wendy Dunn, 2005. "Prices, Production, and Inventories Over the Automotive Model Year," 2005 Meeting Papers 346, Society for Economic Dynamics.
- Adam Copeland & Wendy Dunn & George Hall, 2005. "Prices, Production and Inventories over the Automotive Model Year," NBER Working Papers 11257, National Bureau of Economic Research, Inc.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
- Devavrat Purohit, 1997. "Dual Distribution Channels: The Competition Between Rental Agencies and Dealers," Marketing Science, INFORMS, vol. 16(3), pages 228-245.
- 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.
- Hideo Konishi & Michael Sandfort, 2000. "Existence of Stationary Equilibrium in the Markets for New and Used Durable Goods," Boston College Working Papers in Economics 450, Boston College Department of Economics.
- Konishi, H. & Sandfort, M.T., 2000. "Existence of Stationary Equilibrium in the Markets for New and Used Durable Goods," Papers 00-8, U.S. Department of Justice - Antitrust Division.
- Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, vol. 44(11-Part-2), pages S19-S34, November.
- Preyas S. Desai & Devavrat Purohit, 1999. "Competition in Durable Goods Markets: The Strategic Consequences of Leasing and Selling," Marketing Science, INFORMS, vol. 18(1), pages 42-58.
- Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
- Robert H. Porter & Peter Sattler, 1999. "Patterns of Trade in the Market for Used Durables: Theory and Evidence," NBER Working Papers 7149, National Bureau of Economic Research, Inc.
- Thomas W. Gilligan, 2004. "Lemons and Leases in the Used Business Aircraft Market," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1157-1186, October.
- Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
- Goldberg, Pinelopi Koujianou, 1996. "Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 622-54, June.
- S. Huang & Y. Yang & K. Anderson, 2001. "A Theory of Finitely Durable Goods Monopoly with Used-Goods Market and Transaction Costs," Management Science, INFORMS, vol. 47(11), pages 1515-1532, November.
- Rust, John, 1985. "Stationary Equilibrium in a Market for Durable Assets," Econometrica, Econometric Society, vol. 53(4), pages 783-805, July.
- Subramanian Balachander & Kannan Srinivasan, 1994. "Selection of Product Line Qualities and Prices to Signal Competitive Advantage," Management Science, INFORMS, vol. 40(7), pages 824-841, July.
- Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June.
When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:28:y:2009:i:5:p:950-967. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
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.