Quantitative Marketing and Economics

, Volume 11, Issue 4, pp 403–435 | Cite as

Digital distribution and the prohibition of resale markets for information goods

Article

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.

Keywords

Resale Secondary market Digital Downloads Renting Streaming 

JEL Classifications

M30 L00 K19 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Sachar International CenterBrandeis UniversityWalthamUSA

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