This was an old exam question, now we have some data:
Consider a recent paper, "Internet Exchanges for Used Books," by Anindya Ghose of New York University and Michael D. Smith and Rahul Telang of Carnegie-Mellon. (The text of the paper is available at ssrn.com/abstract=584401.)
The starting point for their analysis is the 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 dispose of them later.
A car salesman will often highlight the resale value of a new car, yet booksellers rarely mention the resale value of a new book. Nevertheless, the value can be quite significant.
This is particularly true in textbook markets, where many books cost well over $100. Judith Chevalier of the Yale School of Management and Austan Goolsbee at the Chicago Business School recently examined this market and found that college bookstores typically buy used books at 50 percent of cover price and resell them at 75 percent of cover price. Hence the price to "rent" a book for a semester is about $50 for a $100 book.
Ms. Chevalier and Mr. Goolsbee found that students were well aware of industry practices and took resale value into account when they bought books. (The study, "Are Durable Goods Consumers Forward Looking? Evidence from College Textbooks," is available at Mr. Goolsbee's Web site, gsbwww.uchicago.edu/fac/austan.goolsbee/website/.
Here is the permalink. Under the fold, you can read about Amazon.com...
Professors Ghose, Smith and Telang chose a random sample of books in print and studied how often used copies were available on Amazon. In their sample, they found, on average, more than 22 competitive offers to sell used books, with a striking 241 competitive offers for used best sellers. The prices of the secondhand books were substantially cheaper than the new, but of course the quality of the used books (in terms of wear and tear) varied considerably.
According to the researchers’ calculations, Amazon earns, on average, $5.29 for a new book and about $2.94 on a used book. If each used sale displaced one new sale, this would be a less profitable proposition for Amazon.
But Mr. Bezos is not foolish. Used books, the economists found, 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.
Moreover, the presence of lower-priced books on the Amazon Web site, Mr. Bezos has noted, may lead customers to "visit our site more frequently, which in turn leads to higher sales of new books." The data appear to support Mr. Bezos on this point.
Applying the authors’ estimate of the displaced sales effect to Amazon’s sales, it appears that only about 16 percent of the used book sales directly cannibalized new book sales, suggesting that Amazon’s used-book market added $63.2 million to its profits.
Furthermore, consumers greatly benefit from this market: the study’s authors estimate that consumers gain about $67.6 million. Adding in Amazon’s profits and subtracting out the $45.3 million of losses to authors and publishers leaves a net gain of $85.5 million.