Secondary Market and New Release: An Abstract

Durable goods are frequently traded in the used market or secondary market after a certain period of use. Due to the possibility of disposal in the secondary market, new buyers' willingness to pay in the primary market depends on the salvage value of the used product. On the other hand, the used product can also substitute new products in the primary market, lowering the willingness to pay. Therefore, the demand changes in the primary market induced by the secondary market transaction can affect the frequency of new releases (launch) and the technology advancement of durable goods. This paper investigates the monopolistic manufacturer's new release and investment decisions when used product is traded in the secondary market. A theoretical model that can capture consumers' choice and the manufacturer's dynamic decision is built, and the equilibrium effect is analyzed. I simulated the impact of the quality difference between the new and used on the probability of new release and the size of used goods demand. The effect of the level of friction in the secondary market, measured by the additional cost of selling used goods, on the secondary market and release choices is also analyzed. I find the product with the larger quality gap between the new and used is likely to have a longer wait time before the new launch and higher used goods demand. Product with better quality is expected to increase the demand for used products because of the substitution induced by the higher price. Additionally, the simulation shows how external factors can affect the primary and secondary market equilibrium. I find empirical evidence from smartphone industry which support theoretical result. First, the product with higher specs, such as better CPU, higher resolution, is likely to have a longer wait time before the new launches. Second, the increase in the used product demand occurring with the new launches of high-end products is likely to be larger than the mid-low range product market changes. Last, the effect of external changes in the primary market is verified by the increase in used product transactions after enacting the policy, which restricts the subsidy on the new mobile phones. The study explains why the manufacturers are diversifying their product portfolio and increasing the friction in the secondary market. The manufacturer may need to consider the potential cannibalization effect, which may be differed by the quality when they make a pricing, new launching decision.