THE SECONDARY MARKET IMPACT OF QUALITY AND PRICING DECISIONS FOR NEW PRODUCT GENERATIONS

We develop a two-period model of firm choice with a used good market in which a monopolist producer of durable goods selects quality and price in each period. Our model allows for endogenous quality improvements and demonstrates the importance of analysing the impact of pricing decisions and quality improvements on the secondary market jointly, as under reasonable circumstances, quality improvements can lead to the appearance of a spurious inverse relationship between the price for a new product and the secondary market price. Examined jointly, quality improvements in the new product are shown to lower used good prices, while higher new good prices have the opposite effect. An empirical investigation using a newly compiled data set of the US video game market supports our theoretical analysis.