Working Paper: NBER ID: w30497
Authors: Charles Hodgson
Abstract: Manufacturers of durable goods can encourage consumers facing transaction costs to upgrade by accepting used units as trade-ins. These “buyback schemes” increase demand for new units, but increase the supply of used units if trade-ins are resold. In this paper, I investigate the equilibrium effects of buyback schemes in the market for business jets. I find that buyback increases demand for new units by 37% at fixed prices. However, in equilibrium this increase in sales is diminished by 38% due to substitution away from new jets among first time buyers. Because of this cannibalization, offering buyback is a dominant strategy for only 3 of the 6 major firms, with 3 firms offering buyback as a best response to other firms’ policies. I show that equilibrium buyback policies can change under counterfactual market structures: a simulated merger leads to a reduction in consumer welfare, 70% of which is due to a change in buyback policy.
Keywords: buyback schemes; transaction costs; business jets; demand; market structure
JEL Codes: L13; L14; L20; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| buyback schemes (L14) | demand for new jets (L93) |
| buyback schemes (L14) | new jet sales (L93) |
| buyback schemes (L14) | supply dynamics of used jets (L93) |
| simulated merger (C59) | consumer welfare (D69) |
| changes in buyback policies (L14) | consumer welfare (D69) |