Patterns of Trade in the Market for Used Durables: Theory and Evidence

Abstract

The consumption value of a durable good diminishes as it ages due to physical deterioration and consumers' preference for the new. We develop a model of consumer specialization and trade in the market for used durables based on imperfect substitutability. Imperfect substitutability across vintages is reflected in a declining market price over time. Heterogeneous consumers maximize utility by specializing in durables of differing ages. Consumers must trade to acquire their preferred vintage each period. When there are transaction costs in the secondhand market, the volume of trade due to specialization increases with imperfect substitutability. We examine the determinants of vehicle ownership transfers in Illinois, a measure of trade volume. Observed patterns of trade across automobile model years are consistent with our model, and inconsistent with a model of adverse selection.