Effect of Electronic Secondary Markets on the Supply Chain

Abstract

We present a model to investigate the competitive implications of electronic secondary markets that promote concurrent selling of new and used goods on a supply chain. In secondary markets where suppliers cannot directly utilize used goods for practicing intertemporal price discrimination and where transaction costs of resales are negligible, the threat of cannibalization of new goods by used goods becomes significant. We examine conditions under which it is optimal for suppliers to operate in such markets, explaining why these markets may not always be detrimental for them. Intuitively, secondary markets provide an active outlet for some high-valuation consumers to sell their used goods. The potential for such resales leads to an increase in consumers' valuation for a new good, leading them to buy an additional new good. Given sufficient heterogeneity in consumers' affinity across multiple suppliers' products, the "market expansion effect" accruing from consumers' cross-product purchase affinity can mitigate the losses incurred by suppliers from the direct "cannibalization effect." We also highlight the strategic role that the used goods commission set by the retailer plays in determining profits for suppliers. We conclude the paper by empirically testing some implications of our model using a unique data set from the online book industry, which has a flourishing secondary market.