Impact of Secondary Electronic Markets on Information Good Suppliers

We develop an analytical framework to investigate the competitive implications of secondary electronic marketplaces which promote concurrent selling of new and used information goods. In secondary markets where suppliers cannot directly use second-hand goods for practicing intertemporal price discrimination, the threat of cannibalization of new goods by used goods become significant. We examine conditions under which it is optimal for suppliers to operate in such markets, explaining why these markets may not always be detrimental to suppliers. Intuitively, secondary markets provide an active outlet for some consumers to sell their second-hand (used) goods. Such sales lead to an increase in their disposable income. This increased income can then be used to buy an additional new good. Thus the “income effect” can mitigate the losses incurred by suppliers from the direct “cannibalization effect” in the presence of secondary markets. We highlight the strategic role which used goods commission set by the retailer plays in determining profits for suppliers and overall channel power. Contrary to conventional wisdom, our model predicts the reduction in the price of new goods when such used goods markets are present. Further, we show that as the used good price increases, the new good price also increases. We conclude the paper by empirically testing two implications of our model using a unique dataset collected from the online book industry.