Exploring the Relationship Between the Markets for New and Used Durable Goods: The Case of Automobiles

Abstract

Given that durable products are long-lived, there exists the possibility of secondary markets for used products as well as the potential for product obsolescence. This is an important issue in markets where technology changes rapidly, because the introduction of new versions of a product can make earlier versions obsolete. More generally, prices of older versions in the secondary market adjust in response to changes incorporated in new versions of the product. Thus, another method of evaluating consumers' response to a new product is by looking at the variation in market prices of the old product. This paper develops a general model to explore the relationship between primary markets for new cars and secondary markets for used cars. The results suggest that the depreciation of used cars is influenced strongly by the types of changes in new model cars.

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