Internet Exchanges for Used Books: An Empirical Analysis of Product Cannibalization and Welfare Impact

Abstract

I nformation systems and the Internet have facilitated the creation of used-product markets that feature a dramatically wider selection, lower search costs, and lower prices than their brick-and-mortar counterparts do. The increased viability of these used-product markets has caused concern among content creators and distributors, notably the Association of American Publishers and Author's Guild, who believe that used-product markets will significantly cannibalize new product sales. This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this paper, we empirically analyze the degree to which used products cannibalize new-product sales for books-one of the most prominent used-product categories sold online. To do this, we use a unique data set collected from Amazon.com's new and used book marketplaces to measure the degree to which used products cannibalize new-product sales. We then use these estimates to measure the resulting first-order changes in publisher welfare and consumer surplus.Our analysis suggests that used books are poor substitutes for new books for most of Amazon's customers. The cross-price elasticity of new-book demand with respect to used-book prices is only 0.088. As a result, only 16% of used-book sales at Amazon cannibalize new-book purchases. The remaining 84% of used-book sales apparently would not have occurred at Amazon's new-book prices. Further, our estimates suggest that this increase in book readership from Amazon's used-book marketplace increases consumer surplus by approximately $67.21 million annually. This increase in consumer surplus, together with an estimated $45.05 million loss in publisher welfare and a $65.76 million increase in Amazon's profits, leads to an increase in total welfare to society of approximately $87.92 million annually from the introduction of used-book markets at Amazon.com.

Using Transaction Prices to Re-Examine Price Dispersion in Electronic Markets

“…Our analysis reveals that consumer surplus is enhanced by as much as $97.92 million per year because of the availability of the electronic market. This finding thus contributes to the literature on the welfare benefits of the Internet (Brynjolfsson et al 2003, Ghose et al 2006, Bapna et al 2008, Forman et al 2009). Consistent with an emerging stream of work (Granados et al 2009), we find that online markets exhibit higher own price elasticity, compared to that of offline markets.…”

“…Finally, electronic markets expand sellers' reach (Ghose et al 2006). As a result, a vendor in an electronic market may have a larger customer base than in a traditional market.…”

“…Electronic markets not only reduce buyers' search costs but also increase sellers' market reach and, consequently, increase their ability to tap more consumers (Ghose et al 2006). Earlier research has shown that the market expansion effect may dominate the competitive effect resulting from more searches, thereby leading to higher price dispersion.…”

“…Various papers in the literature on competition on the Internet have analyzed the own price elasticity of offers listed at shopbots and shopbot-like marketplaces (Baye et al 2004, Ellison and Ellison 2005, Ghose et al 2006. Elasticity measures at Internet shopbots are relevant in our context, because the display of information at these services is comparable to the information displayed on the FSS' electronic market.…”

“…Furthermore, because the density of sellers is typically much higher in online markets than in traditional markets for most commodity products (Ghose et al 2006), own price elasticity should be higher in the online world, because it is easier there for buyers to search across multiple sellers' offerings than in the offline market. Other studies, such as those of Ellison and Ellison (2005) and Granados et al (2009), also find that prices in electronic markets are more elastic than in traditional markets because of increased market transparency and competition.…”