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

The Internet has spawned a number of partially structured electronic second ary markets, which enable the trading of secondary goods between consumers. Many of these, such as Usenet groups, or WWW sites for niche products, ten d to be self-administering; however, there has been significant recent grow th in the number of more general web-based markets of this kind. These elec tronic secondary markets, while facilitating reliable and liquid trade of u sed goods, could also have an impact on the desirability of new products, a s well as products that are complementary/compatible to those traded. We pr esent an economic framework for analyzing how these markets affect the dema nd for a primary product. We examine when it is optimal for a firm to opera te a market of this kind, and when its presence is socially optimal. Surpri singly, we find that in a number of cases, the presence of these markets ha s 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 op erated by manufacturers of primary goods. We also find that in a majority o f cases, it is feasible for a third-party intermediary to profitably operat e such a market. Key parameters that affect the desirability of the market are the existing installed customer base, the cost of information technolog y, the durability of the products in question, their rate of technological obsolescence and the nature of customer preferences. (C) 1998 Elsevier Scie nce B.V. All rights reserved.