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 potential buyers' consumption value from a game 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 surplus by 19% if publishers do not adjust their prices. However, if they adjust prices optimally, it would increase the profits by 78%, and also increase 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: C11, C35, D12, D91, L82, L86, M21, M31