, Volume 11, Issue 4, pp 403-435
Date: 24 Sep 2013

Digital distribution and the prohibition of resale markets for information goods

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Abstract

An existing theoretical literature finds that frictionless resale markets cannot reduce profits of monopolist producers of perfectly durable goods. This paper starts by presenting logical arguments suggesting this finding does not hold for goods consumers tire of with use, implying the impact of resale is an empirical question. The empirical impact is then estimated in the market for video games, one of many markets in which producers may soon legally prevent resale by distributing their products digitally as downloads or streamed rentals. Estimation proceeds in two steps. First, demand parameters are estimated using a dynamic discrete choice model in a market with allowed resale, using data on new sales and used trade-ins. Then, using these parameter estimates, prices, profits, and consumer welfare are simulated under counterfactual environments. When resale is allowed, firms are unable to prevent their goods from selling for low prices in later periods. The ability to do so by restricting resale outright yields significant profit increases. Renting, however, does not raise profits as much due to a revenue extraction problem.

I owe much gratitude to Joel Waldfogel, Katja Seim, and Alon Eizenberg for numerous discussions, suggestions, advice, and generosity with their time. I also thank Ulrich Doraszelski and Lorin Hitt for their helpful input, and the editor and two anonymous referees for insightful comments and suggestions. I also would like to thank Tim Derdenger, Shane Greenstein, Adam Isen, Phil Leslie, Andrew Paciorek, John Riley, David Rothschild, Kent Smetters, Rahul Telang, and Jeremy Tobacman for their suggestions, and Hamilton Chu, David Edery, and Marc Mondhaschen for imparting to me some of their wisdom on the video game industry. I am also grateful for support received from the NBER program on digitization which is kindly funded by the Sloan Foundation.