The merits of the pre-owned strategy: Price competition in multichannel digital goods distribution

Abstract

The provision of pre-owned physical version products by traditional brick-in-store platforms (such as GameStop) was once highly profitable but has rapidly declined with the rise of digital content. As publisher firms sell digital versions directly, they now compete with platforms that sell both new and pre-owned physical versions. This paper conducts an economic analysis on a traditional brick-in-store platform’s pre-owned strategies and a publishing firm’s competition strategies. We examine two key factors that significantly influence competition between pre-owned, digital, and physical versions: distribution contracts (wholesale and agency) and countermeasures (such as exclusive digital content). Generally, pre-owned strategies hurt both the firm and the platform. However, our analysis reveals that pre-owned products benefit platforms under certain condition. From the platform’s perspective, when beneficial, wholesale contract is preferable to agency contracts. Our findings propose an “enticement yet limitation” principle for platform managers when developing pre-owned strategies. From the firm’s perspective, offering extra content as countermeasure is beneficial, helping to mitigate the harmful effects of pre-owned versions and enhancing competitive effectiveness. Our results reveal the operational mechanism behind such content monetization strategy and emphasize the strategic importance of countermeasures when responding to platforms’ pre-owned strategies. Finally, we check the robustness in extensions with considering differences in costs, reservation values and various pre-owned versions. While the pre-owned product has sparked controversy and is generally believed to be detrimental to the industry, our results suggest that content monetization strategy in countermeasure may sometimes be economically beneficial to both firms and platforms. Our findings shed light on the key factors publisher firms and platforms should consider when deairing with pre-owned strategies in the digital content industries.