Digital Downloads and the Prohibition of Resale Markets for Information Goods∗

An existing theoretical literature finds that resale markets cannot reduce producer profits for perfectly durable goods. If the model is relaxed to allow consumers to tire of goods, resale markets may prevent firms from maintaining high market prices resulting in lower profits, contradicting prevailing wisdom. I investigate empirically the welfare effects of curtailing resale in the video game market, one of the industries that can soon legally prevent resale by distributing products solely as digital downloads from places like iTunes, Kindle Store, and PlayStation Network. I first estimate a dynamic model of demand for video games in a market with allowed resale using data on new and used video game sales. I then use the estimated parameters to simulate purchase behavior, optimal prices, and welfare under prohibited resale. I find that when resale is allowed, firms are unable to maintain high market prices for their goods because used goods satisfy residual demand. The ability to do so when resale is prohibited yields significant profit increases. ∗I owe much gratitude to my two principal advisors, Joel Waldfogel and Katja Seim, and special thanks to Alon Eizenberg. I would also like to thank Lorin Hitt for useful comments, Jie Bai, Tim Derdenger, Ulrich Doraszelski, Adam Isen, David Muir, Andrew Paciorek, David Rothschild, Kent Smetters, Walter Theseira, and Jeremy Tobacman for their suggestions and Hamilton Chu and David Edery for imparting to me some of their wisdom on the video game industry. Data used in an earlier version of this paper were kindly provided by VideoGamePriceCharts.com. †Business and Public Policy Department, Wharton School, University of Pennsylvania. Contact: [email protected], http://benjaminshiller.com.