Durable Products with Multiple Used Goods Markets: Product Upgrade and Retail Pricing Implications

Abstract

Used goods markets are currently important transaction channels for durable products. For some durable products, such markets first appeared when retailers started buying back used products from “old” customers and selling them to new ones for a profit (). The growth of electronic peer-to-peer (P2P) markets opened up a second, frictionless used goods channel where new customers can buy used products directly from old customers (). Both these markets compete with the original where retailers sell unused products procured from the manufacturer. This paper focuses on understanding the role that the sequential emergence of the above two used goods markets plays in shaping the of the manufacturer and the of the primary market retailer in the context of a decentralized, dyadic channel dealing with a renewable set of consumers. Our analysis establishes that frequent product upgrades and rising retail prices in durable product sectors of our interest are due to the emergence of the P2P used goods market and how the market interacts with the retail used goods source in altering the relative powers of the channel partners. Moreover, contrary to popular belief, we show that the initial introduction of the retail used goods channel actually discourages introduction of new versions and restrains the rise in retail prices. We also comment on how the two used goods markets affect the profits of the channel partners. We then provide empirical support for our theoretical result regarding product upgrades using data from the college textbook industry, a durable product that fits our model setup.used goods markets, product upgrades, retail pricing, customer buybacks, durable products

Dynamic Demand for New and Used Durable Goods Without Physical Depreciation: The Case of Japanese Video Games

“…In marketing, several papers examine a variety of marketing practices in new and used durable goods markets. These include leasing contracts (e.g., Purohit 1998, Desai andPurohit 1999), channel coordination (Desai et al 2004, Shulman andCoughlan 2007), trade-ins (Rao et al 2009), and retail versus P2P used goods markets (Yin et al 2010). One common feature of these theoretical models is that they assume a market-clearing condition for used goods markets in every period.…”

Speculation in a two-stage retail supply chain

“…Research on used-good markets is fairly extensive in the marketing science literature (see Nair (2007), Rao et al (2009), andYin et al (2010)). This work emphasizes ways in which the resale of used goods, whose value declines steadily with time, affects the sales of new goods.…”

Commentaries and Rejoinder to “Measuring the Impact of Negative Demand Shocks on Car Dealer Networks” by Paulo Albuquerque and Bart J. Bronnenberg

“…3 Durable goods have been studied extensively, beginning with the Coase (1972) conjecture and its subsequent formalization by Bulow (1982) and Stokey (1981). In marketing, researchers have studied product innovations in durable goods markets (e.g., Levinthal and Purohit 1989, Sankaranarayanan 2007, Koenigsberg et al 2011, the effect of secondhand markets (e.g., Purohit 1992, Rao et al 2009, Yin et al 2010, and the financing or leasing/selling of durables (e.g., Purohit 1998, 1999;Chien and Chu 2008;Gilbert 2005, 2009;Desai et al 2010 Car Allowance Rebate System (CARS) program (i.e., the "cash for clunkers" program) is a fascinating case study of the durable goods market, because it has most of the elements that have occupied researchers' interests over the years. The CARS program was a $3 billion government initiative that in effect ran from July 1, 2009 to August 31, 2009 and was designed to stimulate new auto sales and enhance the fuel efficiency of the country's fleet, paying consumers either $3,500 or $4,500 depending on the cars traded in and purchased.…”