Dynamic Demand for New and Used Durable Goods without Physical Depreciation

This thesis studies the interaction between new and used durable goods without physical depreciation. In product categories such as CDs/DVDs and video games, the competition from used goods markets has been viewed as a serious problem by producers. These products physically depreciate negligibly, but owners'consumption values could depreciate quickly due to satiation. Consequently, used goods that are almost identical to new goods may become available immediately after a new product release. However, the existence of used goods markets also provides consumers with a selling opportunity. If consumers are forward-looking and account for the future resale value of a product in their buying decision, used goods markets could increase the sales of new goods. Thus, whether used good markets are harmful or beneficial to new-good producers is an empirical question.To tackle this question, I extend the previous literature in three ways. First, I assemble a new data set from the Japanese video game market. This unique data set includes not only the sales and prices of new and used goods, but also the resale value of used copies, the quantity of used copies retailers purchased from consumers, and the inventory level of used copies at retailers. Second, I develop a structural model of forward-looking consumers that incorporates (i) new and used goods buying decisions, (ii) used goods selling decisions, (iii) consumer expectations about future prices of new and used goods as well as resale values of used goods, and (iv) the depreciation of both owners' and potential buyers' consumption values. Third, I develop a new Bayesian estimation method to estimate my model. In particular, my method can alleviate thecomputational burden of estimating non-stationary discrete choice dynamic programming models with continuous state variables that evolve stochastically over time.The estimation results suggest that consumers are forward-looking in the Japanese video game market and the substitutability between new and used video games is quite low. Using the estimates, I quantify the impact of eliminating the used video game market on new-game revenues. I find that the elimination of used video game market could reduce the revenue for a new game.