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

  • Authors:

  • Anindya Ghose;Michael D. Smith;Rahul Telang

  • Affiliations:

  • Information Systems, Leonard Stern School of Business, New York University, KMC 8-94, 44 West 4th Street, New York, New York 10012;H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, 4800 Forbes Avenue, Hamburg Hall, Pittsburgh, Pennsylvania 15213;H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, 4800 Forbes Avenue, Hamburg Hall, Pittsburgh, Pennsylvania 15213

  • Venue:
  • Information Systems Research
  • Year:
  • 2006

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Abstract

Information 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 Authors 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 booksone of the most prominent used-product categories sold online. To do this, we use a unique data set collected from Amazon.coms 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 Amazons 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 Amazons new-book prices. Further, our estimates suggest that this increase in book readership from Amazons 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 Amazons 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.