Tuesday, August 02, 2005

Are durable goods consumers forward looking?

A "durable good" is a good whose value lasts over some time. A good test is whether or not a good is durable is whether or not it has significant resale value, so a car is durable, but a pizza is not.

My old U Chicago professor, Austin Goolsbee, has a paper demonstrating that text books (which often cost $100+) have a vibrant second hand market through the local campus book store, and this second hand market makes people more willing to buy textbooks in the first place. Amazon's used book program works in a similar way. Since the cross-price elasticity between new and used books is so small (that is, people either buy new books or used books, they rarely substitute one for the other), offering both on Amazon does not cannibalize sales, increases page views, and thus boosts overall revenue. (Good post on this on Marginal Revolution).

So, it seems that people who buy durable goods do consider resale value in their purchase. They are more willing to buy because they know the period rental price will be less than the full purchase price (that is, they will "rent" the book for $50 for one year, but not buy the book for $100).

My behavior on eBay is consistent with this finding. I buy stuff on eBay because I know I'll be able to sell it right back for little to no loss if I end up not liking it. This option value more than makes up for the cost of buying and reselling the item.


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