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For the purpose of this question, I'm only interested in relatively cheap goods (clothing, appliances, furniture, phones), not extremely substantial purchases like cars or houses.

Proceeding from rational choice theory, it seems that the existence of used good markets contribute to demand, since it is more advantageous for an individual to buy a good if they can re-sell it later on. So, from that perspective, by buying a good second-hand and supporting that specific used good market, I am also encouraging first-hand purchasers. Yet, from a behavioral standpoint, at least for items like clothing, it seems that resale value is not really a consideration for buyers. Additionally, I imagine the relative lack of re-selling infrastructure, compared to used cars and houses, for cheaper goods further pushes down the effect of second-hand purchases on first-hand demand.

I understand that any positive effect of second-hand purchases on first-hand demand will vary substantially from good to good, but in general, do second-hand purchases substantially encourage first-hand purchases? Is there any econometric literature exploring the magnitude of this effect?

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    $\begingroup$ Interesting that you only consider positive effect of resale on demand. My first thought was that second-hand goods are close substitutes for first-hand goods and hence their existence should depress demand for the latter. $\endgroup$
    – Giskard
    Feb 22 at 7:07
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    $\begingroup$ There are tech companies that actively squeeze out resales of their products. Hewlett Packard, Cisco, etc will only make BIOS/IOS updates available to customers with a support contract. This means the second-hand price is influenced downward by the first-hand supplier's action because they won't sell a support contract on second-owner goods. $\endgroup$
    – Criggie
    Feb 22 at 19:02
  • $\begingroup$ Interesting question. For me it works both ways. I am encouraged to buy more expensive goods, when there is a good secondary market (e.g. Apple products), but if I see a lot of people trying to sell a product second hand, I may consider it might be not fit for it's purpose. $\endgroup$
    – hitchhiker
    Feb 22 at 21:08
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    $\begingroup$ "I imagine the lack of re-selling infrastructure" - Apparently you've never heard of Plato's Closet, for several years my daughter practically lived there both buying and selling! $\endgroup$
    – Glen Yates
    Feb 22 at 23:40
  • $\begingroup$ @Giskard The motivation for this question is an ethical discussion I had on purchasing goods produced immorally second-hand, so I’m looking at this question from the perspective of an individual who would never buy the good first-hand but might second-hand. The substitute good effect probably predominates from a broader perspective, but I’m more interested about the direct impact of a single individual. $\endgroup$
    – H Huang
    Feb 23 at 1:51

2 Answers 2

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Coase (1972) has a classic treatments of this issue for monopolists selling durable goods. The general idea is that if Alice sells a textbook to Bob, Bob can resell it to Charlie when he is done with it. The ability of Bob to resell to Charlie means that Alice can charge a higher price to Bob, because he can recover some of the price by doing so. But because Alice has to sell new goods in a market where the old goods are a substitute, that competition effect lowers prices. Which effect dominates depends on the situation. Do these effects actually exist? Chevalier and Goolsbee (2009) say yes.

Popular wisdom holds that publishers repeatedly revise college textbooks in order to kill off the secondary market for used books. However, many neo-classical authors argue that, if consumers are forward-looking, such behavior should not be profitable; consumers’ willingness to pay for new books will fall if they know that they can't resell their used books. Using a large new dataset on all textbooks sold in psychology, biology and economics in the 10 semesters from 1997 to 2001, we estimate a demand system for textbooks by college students and test whether textbook consumers are forward looking. Our estimates strongly support the view that students are forward looking and that, when they buy their textbooks, they take into account the probability that they will not be able to resell their books at the end of the semester due to a new edition release. The demand estimates do suggest, however, that students are overly optimistic in their forecasts and that there are also some important frictions in the market for used books that can affect publisher revision decisions. Simulation results suggest that students are sufficiently forward-looking that publishers cannot raise revenues by accelerating current revision cycles, even if revising were costless to the authors.

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    $\begingroup$ For a lot of classes the students don't really have a free choice on whether or not to buy the book because it is required by the class (or students have a serious disadvantage if they don't have it). To me this makes college text books a bad example to study. Is this aspect discussed in the paper? $\endgroup$
    – quarague
    Feb 23 at 16:48
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    $\begingroup$ They do! Check it out for yourself at an open access link like this one: citeseerx.ist.psu.edu/viewdoc/… $\endgroup$
    – BKay
    Feb 23 at 18:26
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Very interesting observation. I doubt there would be any study on type of goods you are looking for as secondary markets for non-durable goods are (at least not until recently) very large. The concepts, however, should not be very different from durable goods market such as that for cars.

Below is a link to a paper from AER which deals with welfare implications of secondary market. I have not read the paper but given that it is from one of the most reputed economics journal they may have touched on this issue. If not you can perhaps consider adding this dimension and have a study of your own.

A Quantitative Analysis of the Used-Car Market

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