Selling Exclusive Goods: The Need for Resale
For many exclusive goods, there exists a vibrant secondary market in which prices consistently exceed those originally charged by the manufacturer. However, managers appear reticent to increase the quantity produced or charge higher prices to align supply and demand. We explore the interdependence between secondary markets and consumer preferences for exclusivity. Under a rational expectations framework, we show that a monopolist can extract consumer value for exclusive goods only with an active resale market. In the absence of preferences for exclusivity or a secondary market, the firm’s optimal strategy reduces to that of the standard monopolist. Further, we show that any price gap between the primary and secondary markets is driven by the secondary market commission rate, and the firm maximizes profits when this is zero. In contrast to the existing literature, we arrive at these conclusions without assuming informational asymmetries between firm and resellers or primary market frictions. For firms, this highlights the potential benefits of establishing proprietary resale markets, with incremental profits obtained through higher primary market prices and not commission payments. We show these results are robust to several alternative model specifications.