Manufacturer’s “1-Up” from Used Games: Insights from the Secondhand Market for Video Games

Abstract

The video game industry has a robust secondhand market for games, even though some of the major gaming-console companies possess the means to shut it down. What is the special ingredient in this industry that would incentivize a manufacturer to give tacit approval to buying and selling used games? In this study, leveraging a game-theoretic model, we investigate the effect of gaming console on a manufacturer’s strategy in the presence of a secondhand market for games. We find that when the manufacturer offers a console that provides additional value outside of playing games (e.g., media hub with apps), the secondhand market improves the manufacturer’s profit, consumer surplus, and social welfare, all at the same time. Moreover, the manufacturer enjoys greater benefit from the secondhand market as the intrinsic value of the console increases. This is in stark contrast with cases where there are no consoles involved or the consoles do not offer any intrinsic value; in such settings, the manufacturer would opt to shut down the secondhand market. Overall, our results have implications that apply not only to the past and present of the gaming industry but also to its future and to other types of platform-based markets for contents.