Dynamic Demand for New and Used Durable Goods without Physical Depreciation: The Case of Japanese Video Games

Abstract:     

For information/digital products, the used goods market has been viewed as a threat by producers. However, it is not clear if this view is justified because the used goods market also provides owners with an opportunity to sell their products. To investigate the impact of the used goods market on new goods sales, we collect a unique data set from the Japanese video game market. Based on the data, we develop and estimate a new dynamic structural model of consumers’ buying and selling decisions. The estimation results show that the consumption value of owners depreciates much faster than that of potential buyers, and consumers are heterogeneous in transaction costs of buying and selling used copies. We also find evidence that new and used copies are not close substitutes, and consumers are forward-looking. The latter suggests that the future resale opportunity could increase consumers’ willingness-to-pay for new copies. Using the estimates, we quantify the impact of eliminating the used game market on publishers’ profits. We find that this policy would reduce the average profits per game by 10% if publishers do not adjust their prices. However, if they adjust prices optimally, it would increase the average profits per game by 19%.

Number of Pages in PDF File: 63

Keywords: Information/Digital Products, Durable Goods, Used Goods Market, Demand Estimation, Dynamic Programming, Transaction Costs, Satiation, Discount Factor, Bayesian Estimation

JEL Classification: C33, C35, D12, D91, L82, L86, M21, M31

working papers series