Used goods, not used bads: Profitable secondary market sales for a durable goods channel |
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Authors: | Jeffrey D Shulman Anne T Coughlan |
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Institution: | (1) Marketing Department, University of Washington Business School, Seattle, WA 98195-3200, USA;(2) Marketing Department, Kellogg School of Management, Northwestern University, Evanston, IL 60208-2008, USA |
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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.
Electronic supplementary material Supplementary material is available in the online version of this article at (doi:) and is accessible for authorized users.
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Keywords: | Channels of distribution Game theory Durable goods Used-goods markets Channel coordination |
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