ESSAYS ON QUALITY IMPROVEMENT AND SECOND HAND MARKET IN THE VIDEO GAME INDUSTRY

Abstract

The existence of secondary markets mean that producers of durable goods must compete with previous generations of their own products. Firms can engage in planned obsolescence to limit the scope of this competition. This paper develops a two-period model with a monopolist producer of durable goods, continuously distributed consumers, and a robust secondary market. Firms are shown to deliberately reduce the resale value of previous production by focusing on introducing new generations with large quality improvements. An empirical application to the US video game market confirms that used video game prices experience larger falls when new generation game titles have relatively higher quality levels. The analysis suggests an important role for the secondary market in firm planning. Industries which produce durables, such as video game companies, make contemporaneous production decisions with an eye toward planned obsolescence of previous generations of their own products.

Berry (1994) and some later papers provide a way to estimate differentiated product models. When the product of interest is a durable good, consumers do not pay the entire retail price due to the existence of the second hand market. This paper employs data from the US video game market and proposes a new angel to investigate the demand side of a durable good. The results of the empirical investigation suggests that the inclusion of the future resale price makes the model estimation more sensible and reasonable.