When Do Secondary Markets Harm Firms?

Jiawei Chen; Susanna Esteban; Matthew Shum

doi:10.1257/aer.103.7.2911

American Economic Review Vol. 103 No. 7 2013

When Do Secondary Markets Harm Firms?

Jiawei Chen¹; Susanna Esteban²; Matthew Shum³

¹ University of California, Irvine, 3151 Social Science Plaza A, Irvine, CA 92697. · ² Universitat Autònoma de Barcelona and the Barcelona GSE, Building B, UAB, Bellaterra 08193, Spain. · ³ California Institute of Technology, MC 228-77, 1200 East California Blvd., Pasadena, CA 91125.

Abstract

To investigate whether secondary markets aid or harm durable goods manufacturers, we build a dynamic model of durable goods oligopoly with transaction costs in the secondary market. Calibrating model parameters using data from the US automobile industry, we find the net effect of opening the secondary market is to decrease new car manufacturers' profits by 35 percent. Counterfactual scenarios in which the size of the used good stock decreases, such as when products become less durable, when the number of firms decreases, or when firms can commit to future production levels, increase the profitability of opening the secondary market.

DOI: 10.1257/aer.103.7.2911
Volume: 103
Issue: 7
Pages: 2911-2934
Language: en
Sources: bibtex:phds-export.bib openalex crossref

When Do Secondary Markets Harm Firms?

Abstract

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