Secondary markets have not historically possessed the characteristics necessary
for market power to emerge, or effective product differentiation to be implemented. The
potential effects of these characteristics on primary – secondary market interaction is
generally not considered. The law of one price is expected to hold in secondary markets.
By applying the hedonic technique to producer theory, and integrating the durability of
the product directly into the profit maximizing conditions, potential differences in
implicit prices between customer segments in the used bucket truck market are
estimated.
Applying weighted least squares to the hedonic equation, parameters were
estimated to indicate whether differences in hedonic prices exist between customer
segments in the secondary, utility construction equipment market. The hedonic
approach accounted for differences in price due to physical characteristics, while
underlying supply and demand conditions were accounted for using indicator variables
for time. Estimated differences in the effects of physical characteristics on price,
between industries, were identified using interaction terms. Results of the econometric
estimation indicate that differences in physical product characteristics do not fully
account for differences in price between customer segments in the secondary bucket
truck market.
If the law of one price can be violated in a secondary market, this could
indicate market power. Future research on primary – secondary market interaction
should consider the potential effects, if such market power does indeed exist