Second-Hand Markets and Intrasupply Chain Competition

We consider a monopolistic supply chain consisting of a manufacturer and a retailer (service provider) who in addition to selling new durables, buy and resell used ones. The supply chain provides services for both new and used goods. Accordingly, consumers incur service charges for all types of goods. This study is motivated by the modern trend in cell phone businesses where retailers commence buying used phones from customers willing to upgrade their phones. The used phones are then refurbished and resold along with the services. The question that this trend gives rise to is how the interaction with the secondary market affects the performance of the supply chain in terms of its intracompetition and thereby its profit. We show that for a wide range of service rates, the second-hand market coordinates the supply chain by either reducing the double marginalization effect or by offsetting it with extra profits gained by servicing the used goods. This, however, does not imply that both parties always improve their profits. Furthermore, we find that when the service rates are low, the supply chain would be better off if the goods were not durable thereby precluding the very existence of the second-hand market. (C) 2011 New York University. Published by Elsevier Inc. All rights reserved.