Welfare Implications of Secondary Electronic Markets

We develop a game-theoretical framework to investigate the competitive implications of Consumer-to-Consumer electronic marketplaces, which promote concurrent selling of new and used goods. In many e-marketplaces, where suppliers cannot directly use second-hand goods for practicing inter-temporal price discrimination, the threat of cannibalization of new goods by used goods become significant. We examine conditions under when it is optimal for suppliers to operate in such markets, explaining why used goods markets may not be detrimental for them. While a monopolist supplier is worse off in the presence of a secondary market, competition can in fact make it better off. The presence of used good markets provides an active outlet for some consumers to sell their second-hand goods. This leads to two countervailing effects and the net result for suppliers is contingent upon different parameters. Overall, for a wide range of parameters, there is an increase in social welfare from establishing such secondary markets.