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

51 Pages Posted: 16 Dec 2012 Last revised: 1 Feb 2017

Masakazu Ishihara

New York University (NYU) - Leonard N. Stern School of Business

Andrew Ching

University of Toronto - Rotman School of Management; University of Toronto - Department of Economics

Date Written: September 8, 2016

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 potential buyers' consumption value deteriorates by 50% from the release week to the second week, and game owners' consumption value deteriorates by 22-49% after the first week of ownership and the rate depends on game characteristics. Examination of the cross-price elasticities suggests that the elasticities tend to be high especially when the used-game inventory at retailers is low, but they quickly decrease as the inventory is accumulated. Using the estimates, we quantify the impact of eliminating the used game market on publishers' profits and consumer welfare. We find that this policy would increase publishers' profits by 2%, but reduce the consumer welfare by 19% if publishers do not adjust their prices. However, if they adjust prices optimally, it would increase the profits by 79%, and also the consumer surplus by 141% due to lower new prices.

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

Suggested Citation

Ishihara, Masakazu and Ching, Andrew, Dynamic Demand for New and Used Durable Goods without Physical Depreciation: The Case of Japanese Video Games (September 8, 2016). Rotman School of Management Working Paper No. 2189871. Available at SSRN: https://ssrn.com/abstract=2189871 or http://dx.doi.org/10.2139/ssrn.2189871

Masakazu Ishihara (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Andrew Ching

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

HOME PAGE: http://www.rotman.utoronto.ca/andrew.ching

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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