Second-hand markets and collusion by manufacturers of semidurable goods

Abstract

I show that when oligopolistic firms manufacture semidurable goods, second-hand markets can play a key role in supporting collusive behavior. This in spite of the fact that a monopolist manufacturer has an incentive to eliminate second-hand markets – a point made by a number of authors. The idea that second-hand markets facilitate collusion is supported by the many examples in which manufacturers strengthen secondhands markets, e.g. by providing warranty coverage across owners, or by encouraging dealers to accept trade-ins. The intuition is that the prospect of obtaining a high price in a second-hand market increases the demand for new goods. This means that the expectation of a price war unleashed by the violation of a collusive agreement will decrease not only the future prices of the new and used goods but also the current price of the new good, thus making the defection itself less profitable. In this framework, I analyze the role of leasing policies, buyback policies and warranty coverage for used units