Quantitative Marketing and Economics

, Volume 5, Issue 2, pp 191–210 | Cite as

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

Article

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.

Keywords

Channels of distribution Game theory Durable goods Used-goods markets Channel coordination 

JEL Classification

M31 

Supplementary material

11129_2006_9017_MOESM1_ESM.pdf (234 kb)
Technical AppendixUsed goods, not used bads: Profitable secondary market sales for durable goods channel QMEC 124R (PDF 239 kb)

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Marketing DepartmentUniversity of Washington Business SchoolSeattleUSA
  2. 2.Marketing Department, Kellogg School of ManagementNorthwestern UniversityEvanstonUSA

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