Effect of Electronic Secondary Markets on the Supply Chain

We present a model to investigate the competitive implications ofelectronic secondary markets that promote concurrent selling of new andused goods on a supply chain. In secondary markets where supplierscannot directly utilize used goods for practicing intertemporal pricediscrimination and where transaction costs of resales is negligible, thethreat of cannibalization of new goods by used goods become significant.We examine conditions under which it is optimal for suppliers to operatein such markets, explaining why these markets may not always bedetrimental for them. Intuitively, secondary markets provide an activeoutlet for some highvaluation consumers to sell their used goods. Thepotential for such resales lead to an 05 ghose.pmd 91 8/26/2005, 1:10 PM92 GHOSE, TELANG, AND KRISHNAN increase in consumersâ valuationfor a new good, leading them to buy an additional new good. Givensufficient heterogeneity in consumerâ s affinity across multiplesuppliersâ products, the â market expansion effectâaccruing from consumersâ cross-product purchase affinity canmitigate the losses incurred by suppliers from the direct âcannibalization effect.â We also highlight the strategic rolethat used goods commission set by the retailer plays in determiningprofits for suppliers. We conclude the paper by empirically testing someimplications of our model using a unique data set from the online bookindustry, which has a flourishing secondary market.