An economic analysis of electronic secondary markets: installed base, technology, durability and firm profitability

The Internet has spawned a number of partially structured electronic secondary markets, which enable the trading of secondary goods between consumers. Many of these, such as Usenet groups, or WWW sites for niche products, tend to be self-administering; however, there has been significant recent growth in the number of more general web-based markets of this kind. These electronic secondary markets, while facilitating reliable and liquid trade of used goods, could also have an impact on the desirability of new products, as well as products that are complementary/compatible to those traded. We present an economic framework for analyzing how these markets affect the demand for a primary product. We examine when it is optimal for a firm to operate a market of this kind, and when its presence is socially optimal. Surprisingly, we find that in a number of cases, the presence of these markets has a primary positive effect on the profitability of a new good; this leads us to conjecture that there will soon be a number of such trading forums operated by manufacturers of primary goods. We also find that in a majority of cases, it is feasible for a third-party intermediary to profitably operate such a market. Key parameters that affect the desirability of the market are the existing installed customer base, the cost of information technology, the durability of the products in question, their rate of technological obsolescence and the nature of customer preferences. (C) 1998 Elsevier Science B.V. All rights reserved.