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Internet Exchanges for Used Digital Goods

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journal contribution
posted on 01.01.2008, 00:00 authored by Michael SmithMichael Smith, Rahul TelangRahul Telang
In spite of industry concerns, prior work has shown that Internet used book markets do not significantly cannibalize new book sales. In this research note we analyze similar data from markets for CDs and DVDs, goods that because of their digital characteristics may be more susceptible to cannibalization than books are. We find that the cross price elasticity of new product demand with respect to used product prices is far higher for CDs (0.157) and DVDs (0.514) than it is for books (0.088). These higher cross price elasticities translate into higher levels of cannibalization: 24% of used CDs and 86% of used DVDs directly cannibalize new product sales. This compares to a 16% cannibalization rate for used book sales. Cannibalization is a concern to the music and movie industries because used sales generate no direct revenue to studios or royalties to artists. From a managerial perspective, while the digital characteristics of these products may be driving increased levels of cannibalization in traditional channels, digital distribution may provide a solution to the cannibalization threat posed by secondary markets. While the first sale doctrine allows consumers to resell copyrighted physical media, the dominant legal view is that the first sale doctrine does not apply to products that are distributed digitally. Thus, one benefit of the transition from a physical to a digital distribution model is that it would also allow movie and music companies to transition away from secondary markets for used products, and the associated cannibalization effects.