This paper specifies and estimates a structural dynamic model of consumer demand for new and used durable goods. Its primary contribution is to provide an explicit estimation procedure for transaction costs. Identification of transaction costs is achieved from the variation in the share of consumers choosing to hold a given car type each period, and from the share of consumers choosing to purchase the same car type that period. Specifically, I estimate a random coefficient discrete-choice model that incorporates a dynamic optimal stopping problem in the spirit of Rust (1987). I apply this model to evaluate the impact of scrappage subsidies on the Italian automobile market.

A decision maker offers a new product to a number of potential adopters. He does not know the value of the product but adopters receive some private information about it. We study how the decision maker may influence learning among adopters by manipulating the launch sequence when both the decision maker and adopters can learn about the value of the product from previous adoption decisions. The conditions under which the decision maker prefers a sequential launch to a simultaneous launch depend on adopters' prior beliefs about the value of the product and adoption costs. We derive the decision maker's optimal launch sequence and study how it endogenizes informational herding.

Sales are a widespread and well-known phenomenon that has been documented in several product markets. Regularities in such periodic price reductions appear to suggest that the phenomenon cannot be entirely attributed to random variations in supply, demand, or the aggregate price level. Certain sales are traditional and so well publicized that it is difficult to justify them as devices to separate informed from uninformed consumers. This paper presents a model in which sellers want to reduce prices periodically in order to improve their ability to collude over time. In particular, the study shows that if buyers have heterogeneous storage technologies, periodic sales may facilitate collusion by magnifying intertemporal linking in consumers decisions. The stability and the pro…tability of different sale strategies is then explored. The optimal sales discount and timing of sales are characterized. A trade-off between cartel size and aggregate profits arises.

We test the effect of Internet on effIciency in a major decentralized marketplace: the used car market in California. Reduced form analysis shows that the Internet has a positive effect on volume of trade, moving the market equilibrium closer to the Walrasian ideal. We estimate a dynamic structural model of vehicle demand to obtain a direct measure of market frictions. We show that these are equal to approximately twenty percent of the average used car price, representing a significant wedge between supply and demand. From 1997 to 2007, the elasticity of these transaction costs with respect to Internet penetration is -0.06, representing an average increase in shared surplus of $350 per used car traded.

We explain why a durable good monopolist would knowingly create a shortage in the marketplace. We argue that this incentive arises from the presence of a second-hand market and uncertainty about consumers' willigness to pay for the good at the time of its launch. Consumers are heterogeneous in their valuations. They are initially uninformed about their valuations but become informed over time. Selling fewer units than the number of consumers who wish to buy in the early stage increases the product's resale value, and hence the product's equilibrium price. We show the monopolist may prefer to have the second-hand market. Essentially, the second-hand market allows for a reallocation of the product among consumers once they learn about their valuations. The reallocation generates additional surplus which can be extracted by the monopolist ex ante.

Last Updated July 2011