Used goods, not used bads: Profitable secondary market sales for a durable goods channel

Used goods, not used bads: Profitable secondary market sales for a durable goods channel The existing literature on channel coordination typically models markets where used goods are not sold, or are sold outside the standard channel. However, retailers routinely sell used goods for a profit in markets like textbooks. Further, such markets are characterized by a renewable consumer population over time, rather than the static consumer population often assumed in prior literature. We show that accounting for these market characteristics alters the optimal contract form as compared to the contracts derived in prior research. In particular, when new goods are sold in both the first and second periods of our model, the optimal contract differs from those in prior literature in that it can exhibit a negative fixed fee in the second period and requires contracting over the resale price in the second period. The model shows that the manufacturer makes higher profits from allowing used-good sales alongside new-good sales than from shutting down the retailer-profitable secondary market, and that unit sales expand with a profitable secondary market over those achievable without a secondary market. Furthermore, in contrast to previous investigations of durable goods markets that ignore the possibility of a retailer-profitable secondary market, we show conditions under which the manufacturer would optimally choose to sell no new goods in the second period, ceding the market entirely to the used-goods retailer. This research thus expands our knowledge of how durable goods markets work by incorporating the profitable operation of a retailer-run resale market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png QME Springer Journals

Used goods, not used bads: Profitable secondary market sales for a durable goods channel

QME, Volume 5 (2) – Jun 5, 2007

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Publisher
Springer Journals
Copyright
Copyright © 2007 by Springer Science+Business Media, LLC
Subject
Business and Management; Marketing; Economic Theory/Quantitative Economics/Mathematical Methods; Statistics for Business/Economics/Mathematical Finance/Insurance
ISSN
1570-7156
eISSN
1573-711X
DOI
10.1007/s11129-006-9017-x
Publisher site
See Article on Publisher Site

Abstract

The existing literature on channel coordination typically models markets where used goods are not sold, or are sold outside the standard channel. However, retailers routinely sell used goods for a profit in markets like textbooks. Further, such markets are characterized by a renewable consumer population over time, rather than the static consumer population often assumed in prior literature. We show that accounting for these market characteristics alters the optimal contract form as compared to the contracts derived in prior research. In particular, when new goods are sold in both the first and second periods of our model, the optimal contract differs from those in prior literature in that it can exhibit a negative fixed fee in the second period and requires contracting over the resale price in the second period. The model shows that the manufacturer makes higher profits from allowing used-good sales alongside new-good sales than from shutting down the retailer-profitable secondary market, and that unit sales expand with a profitable secondary market over those achievable without a secondary market. Furthermore, in contrast to previous investigations of durable goods markets that ignore the possibility of a retailer-profitable secondary market, we show conditions under which the manufacturer would optimally choose to sell no new goods in the second period, ceding the market entirely to the used-goods retailer. This research thus expands our knowledge of how durable goods markets work by incorporating the profitable operation of a retailer-run resale market.

Journal

QMESpringer Journals

Published: Jun 5, 2007

References

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