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Sunday, July 31, 2005

Internet, Used Goods Sale, Bargain Hunting & Net Gain

Hal Varian finds that used goods sale at sites like eBay and Amazon are in fact a positive development for the industry. While Amazon is best known for selling new products, an estimated 23 percent of its sales are from used goods, many of them secondhand books. Used bookstores have been around for centuries, but the Internet has allowed such markets to become larger and more efficient. Consumers probably save a few dollars while authors and publishers may lose some sales from a used book market. Yet the evidence suggests that the costs to publishers are not large, and also suggests that the overall gains from such secondhand markets outweigh any losses.
There seems to be a double-edged impact of a used book market on the market for new books. When used books are substituted for new ones, the seller faces competition from the secondhand market, reducing the price it can set for new books. But there's another effect: The presence of a market for used books makes consumers more willing to buy new books, because they can easily Used books, the economists found inside Amazon, are not strong substitutes for new books. An increase of 10 percent in new book prices would raise used sales by less than 1 percent. In economics jargon, the cross-price elasticity of demand is small. One plausible explanation of this finding is that there are two distinct types of buyers: some purchase only new books, while others are quite happy to buy used books. As a result, the used market does not have a big impact in terms of lost sales in the new market. Bezos notes that the presence of lower-priced books on the Amazon Web site, may lead customers to "visit our site more frequently, which in turn leads to higher sales of new books."

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