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Trade-ins and Transaction Costs in the Market for Used Business Jets

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  • 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. I investigate the equilibrium effects of buyback schemes in the market for business jets. I find that buyback increases manufacturer revenue by 7.2 percent at fixed prices. However, in equilibrium this revenue gain is diminished by 43 percent due to substitution away from new jets among first time buyers. I show how the size of this cannibalization effect depends on preference heterogeneity.

Suggested Citation

  • Charles Hodgson, 2023. "Trade-ins and Transaction Costs in the Market for Used Business Jets," American Economic Journal: Microeconomics, American Economic Association, vol. 15(4), pages 350-391, November.
    • Handle: RePEc:aea:aejmic:v:15:y:2023:i:4:p:350-91
    DOI: 10.1257/mic.20190325
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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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