Date Added: Apr 2010
Do active secondary markets aid or harm durable goods manufacturers? The authors build a dynamic equilibrium model of durable goods oligopoly, with consumers who incur lumpy costs when transacting in the secondary market, and calibrate it to U.S. auto-mobile industry data. By varying transaction costs, they obtain a direct measure of the competitive pressure that secondary markets create on durable goods manufacturers. For the calibrated parameter values, closing down the secondary market increases (net) profits of new car manufacturers by 39%. This suggests that regulatory changes that lower liquidity in secondary markets may aid manufacturers.