Dynamic Demand for New and Used Durable Goods without Physical Depreciation: The Case of Japanese Video Games

For information/digital products, the used goods market has been viewed as a threat by producers. However, it is not clear whether this view is justified because the used goods market also provides owners with an opportunity to sell their products. To investigate the impact of the used goods market on new goods sales, we collect a unique data set from the Japanese video game market. On the basis of the data, we develop and estimate a new dynamic structural model of consumers' buying and selling decisions. The estimation results show that potential buyers' consumption value from a game deteriorates by 50% from the release week to the second week, and game owners' consumption value deteriorates by 23%-58% after the first week of ownership, and the rate depends on game characteristics. Examination of the cross-price elasticities suggests that the elasticities tend to be high especially when the used-game inventory at retailers is low, but they quickly decrease as the inventory is accumulated. Using the estimates, we quantify the impact of eliminating the used game market on publishers' profits and consumer welfare. We find that holding the new-copy price at the observed level, this policy would increase publishers' profits by 7.3% but reduce the consumer surplus by 0.9%, resulting in an overall decrease in social surplus by 0.3%. However, if firms adjust prices optimally, it would increase the profits by 26.8% and also increase the consumer surplus by 1.4% owing to lower new game's prices. Overall, the social surplus increases by 2.7%.