Internet Exchanges for Used Books: An Empirical Analysis of Product Cannibalization and Welfare Impact

Abstract

Information systems and the Internet have facilitated the creation of used product markets that feature a dramatically wider selection, lower search costs, and lower prices than their brick-and-mortar counterparts do. The increased viability of these used product markets has caused concern among content creators and distributors, notably the Association of American Publishers and Author's Guild, who believe that used product markets will significantly cannibalize new product sales.

This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this paper, we empirically analyze the degree to which used products cannibalize new product sales for books - one of the most prominent used product categories sold online. To do this, we use a unique dataset collected from Amazon.com's new and used book market-places to measure the degree to which used products cannibalize new product sales. We then use these estimates to measure the resulting first-order changes in publisher welfare and consumer surplus.

Our analysis suggests that used books are poor substitutes for new books for most of Amazon's customers. The cross-price elasticity of new book demand with respect to used book prices is only 0.088. As a result only 16% of used book sales at Amazon cannibalize new book purchases. The remaining 84% of used book sales apparently would not have occurred at Amazon's new book prices. Further, our estimates suggest that this increase in book readership from Amazon's used book marketplace increases consumer surplus by approximately $67.21 million annually. This increase in consumer surplus, together with an estimated $45.05 million loss in publisher welfare and a $65.76 million increase in Amazon's profits, leads to an increase in total welfare to society of approximately $87.92 million annually from the introduction of used book markets at Amazon.com.

Keywords: Publisher welfare, retailer welfare, consumer surplus, price competition, used books sales, electronic markets