Price Elasticities and Social Welfare in Secondary Electronic Markets

Extended Abstract Electronic exchanges have enhanced the viability of secondary markets including markets for used books. Online used book markets offer a wider selection, lower search costs, and significantly lower prices than do physical used bookstores. The increased viability of online used book markets has caused concern among groups such as the Book Publishers Association and Author's Guild, who believe that used book markets will significantly cannibalize new book sales. These propositions, while theoretically possible, are based on speculation as opposed to empirical evidence. In this research, we use a unique dataset collected from Amazon.com's new and used marketplaces to estimate the impact of online used book markets on new book sales. Our analysis suggests that only 15 percent of used book sales at Amazon cannibalize new book purchases. The remaining 85 percent of used book sales apparently would not have occurred at Amazon's new book prices. This low cannibalization means that book publishers lose approximately $32 million in gross profit (about 0.2 percent of total gross profit) from the presence of Amazon's used book markets, while Amazon's net revenues increased by $64.1 million dollars. Finally, consumer surplus increases by approximately $70.2 million. Thus, we find that the first-order impact of the availability of electronic used-book exchange markets at Amazon on total welfare is positive. Further, additional used book readership may mitigate author losses through increased revenue from secondary sources such as speaking and licensing fees.