Working Paper: CEPR ID: DP17954
Authors: Marium Ashfaq; Flavio Toxvaerd
Abstract: We analyse an overlapping generations model of manufacturer certification in durable goods markets with asymmetric information about the quality of used goods. The functioning of second-hand markets has two effects on markets for new goods, a substitution and a resale value effect. Through certification, manufacturers reduce adverse selection in second-hand markets and extract resulting rents through the markets for new goods. Certification may increase profits at the expense of social welfare, by increasing average quality while decreasing trading volume. Manufacturers may be willing to subsidise certification to increase profits on new goods and thus have an advantage over third-party certifiers.
Keywords: durable goods; secondhand markets; adverse selection; certification
JEL Codes: L11; L15; L62; L68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Certification (Y20) | Reduced adverse selection in secondhand markets (D82) |
| Reduced adverse selection in secondhand markets (D82) | Higher prices for new goods (D49) |
| Certification (Y20) | Higher prices for new goods (D49) |
| Certification (Y20) | Increase in average quality in secondhand market (L15) |
| Certification (Y20) | Decrease in trading volume in secondhand market (F12) |
| Certified used goods (L68) | Cannibalization of new goods sales (D16) |
| Manufacturers subsidize certification (L68) | Enhanced profits on new goods (D43) |