Ghose, Smith and Telang (2006)

Source Details

Ghose, Smith and Telang (2006)
Title:	Internet Exchanges for Used Books: An Empirical Analysis of Product Cannibalization and Welfare Impact
Author(s):	Ghose, A., Smith, M. D., Telang, R.
Year:	2006
Citation:	Ghose, A., Smith, M.D. and Telang, R., 2006. Internet exchanges for used books: An empirical analysis of product cannibalization and welfare impact. Information Systems Research, 17(1), pp.3-19.
Link(s):	Definitive , Open Access
Key Related Studies:	Chen and Png (2003) Liebowitz (1985)
Discipline:	O33: Technological Change: Choices and Consequences • Diffusion Processes O34: Intellectual Property and Intellectual Capital
Linked by:

About the Data
Data Description:	The study uses a unique dataset collected from Amazon.com’s new and used marketplaces to estimate the impact of online used book markets on new book sales. The data includes over 9.8 million new and used price observations for 393 individual book titles.
Data Type:	Primary data
Secondary Data Sources:
Data Collection Methods:	Quantitative Collection Methods Quantitative data/text mining Qualitative Collection Methods Case Study
Data Analysis Methods:	Quantitative Analysis Methods Descriptive statistics (counting; means reporting; cross-tabulation) Quantitative content analysis (e.g. text or data mining)
Industry(ies):	Publishing of books, periodicals and other publishing
Country(ies):	United States
Cross Country Study?:	No
Comparative Study?:	No
Literature review?:	No
Government or policy study?:	No
Time Period(s) of Collection:	September 2002 - March 2003 April 2004 - July 2004
Funder(s):

Abstract

"Information technology-enabled exchanges have enhanced the viability of a variety of secondary markets, notably markets for used books. Electronic used book exchanges, in particular, offer a wider selection, lower search costs, and significantly lower prices than physical used bookstores do. The increased viability of these used book markets has caused concern among groups such as the Book Publishers Association and Author’s Guild who believe that used book markets will significantly cannibalize new book sales. This proposition, while theoretically possible, is based on speculation as opposed to empirical evidence. In this research, we use a unique dataset collected from Amazon.com’s new and used marketplaces to estimate the impact of IT-enabled used book markets on new book sales. We use these data to calculate the impact of these secondary market exchanges on consumer and publisher welfare by calculating the cross-price elasticity of new books sales with respect to used book prices. Our analysis suggests that IT-enabled secondary market exchanges increase consumer surplus by approximately $70 million annually. Further, we find that only 15% of used book sales at Amazon cannibalize new book purchases. The remaining 85% of used book sales apparently would not have occurred at Amazon’s new book prices. This low cannibalization means that book publishers lose only $32 million in gross profit annually (about 0.2% of total gross profit) due to the presence of Amazon’s used book markets. Further, the additional used book readership gain from these electronic markets may mitigate author losses through increased revenue from secondary sources such as speaking and licensing fees. These surplus changes, combined with the estimated $64 million the used book market added to Amazon’s gross profits, show that IT-enabled used markets for books have a strong positive first-order impact on total welfare."

Main Results of the Study

In this research, the authors analyze the impact of used book markets on new book sales at Amazon.com. They find that the while 29.9 million used book sales took place in 2002 on Amazon.com’s site, only 4.5 million of these sales cannibalized new book sales. The remaining sales apparently would not have occurred at Amazon’s new book price. While these cannibalized sales result in an estimated $31.9 million loss to publishers annually, the total welfare gain to society from this IT-enabled market is $102.4 million annually after considering the $64.1 million gain in Amazon.com’s gross profits and the $70.2 million gain in consumer surplus.

Policy Implications as Stated By Author

The implication of this finding for publishers is that, at least at the present, used book markets do not significantly cannibalize new book sales — even in a market that lists used copies side by side with new. Additionally, the authors' estimates by individual book type suggest that customers are less sensitive to low used book prices for hardcover and fiction titles and current bestsellers, some of the categories that publishers may be most interested in protecting from cannibalization.

Coverage of Study

Coverage of Fundamental Issues

Issue	Included within Study
Relationship between protection (subject matter/term/scope) and supply/economic development/growth/welfare
Relationship between creative process and protection - what motivates creators (e.g. attribution; control; remuneration; time allocation)?
Harmony of interest assumption between authors and publishers (creators and producers/investors)
Effects of protection on industry structure (e.g. oligopolies; competition; economics of superstars; business models; technology adoption)
Understanding consumption/use (e.g. determinants of unlawful behaviour; user-generated content; social media)

Coverage of Evidence Based Policies

Issue	Included within Study
Nature and Scope of exclusive rights (hyperlinking/browsing; reproduction right)
Exceptions (distinguish innovation and public policy purposes; open-ended/closed list; commercial/non-commercial distinction)
Mass digitisation/orphan works (non-use; extended collective licensing)
Licensing and Business models (collecting societies; meta data; exchanges/hubs; windowing; crossborder availability)
Fair remuneration (levies; copyright contracts)
Enforcement (quantifying infringement; criminal sanctions; intermediary liability; graduated response; litigation and court data; commercial/non-commercial distinction; education and awareness)

Datasets

Sample size:	393
Level of aggregation:	Books
Period of material under study:	2002 to 2004

Sample size:	9,800,000
Level of aggregation:	Price observations
Period of material under study:	2002 to 2004