Used Goods, Not Used Bads: Profitable Secondary Market Sales for a Durable Goods Channel

The existing literature on channel coordination typically models markets where used goods are not sold, or are sold outside the standard channel. However, retailers routinely sell used goods for a profit in markets like textbooks, compact discs, and DVDs. We model key characteristics of these markets and show that the optimal contract form resembles those seen in the marketplace (and differs from contracts derived in prior research). Furthermore, we show conditions under which the manufacturer would choose to sell no new goods in the second period, ceding the market to the used-goods retailer. We also examine how consumer and firm characteristics affect the size of the used-good market.