APPLIED MICRO: How Secondary Markets Undermine Social Responsibility; Professor Botond Koszegi (University of Bonn)

Abstract

We model and analyze secondary markets for durable goods when primary-market production causes negative externalities and secondary-market trade is driven by consumers’ social responsibility. Secondary markets may benefit society by allowing responsible consumers to take used goods that would otherwise be discarded, but they also introduce three harmful forces. First, the possibility of buying used goods and thereby causing less harm can raise the demand of responsible consumers, often increasing the production necessary to serve the market. Second, said demand can raise the price of used goods, encouraging purchases of new goods. Third, the possibility of selling used goods and thereby lowering primary purchases by others can make new goods less aversive to responsible consumers, again encouraging new purchases. These forces imply that if used goods have positive private consumption utility, then secondary markets always raise production and lower welfare. If used products may have significantly negative private consumption utility, then secondary markets can raise or lower welfare.

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