Article | Strategic Management Journal | Forthcoming

Cannibalization and Option Value Effects of Secondary Markets: Evidence from the U.S. Concert Industry

by Victor Manuel Bennett, Robert Seamans and Feng Zhu

Abstract

We examine how reducing search frictions in secondary markets affects the value appropriated by firms in primary markets. We characterize two effects on primary market firms caused by intermediaries entering secondary markets: the "cannibalization" and "option value" effects. Separation between primary and secondary markets can drive which of the two effects dominates. Firms selling valuable and scarce products are more likely to have separate primary and secondary markets and will therefore appropriate more value when secondary markets thicken. Firms selling products that are not valuable and scarce will be hurt. Further, we hypothesize that firms have incentives to engineer scarcity by limiting supply when secondary markets thicken to separate primary and secondary markets. We find support for these hypotheses in the U.S. concert ticket industry.

Keywords: cannibalization effect; option value effect; secondary markets; concert industry; Craigslist; Competition; Distribution Channels; Entertainment and Recreation Industry;

Citation:

Bennett, Victor Manuel, Robert Seamans, and Feng Zhu. "Cannibalization and Option Value Effects of Secondary Markets: Evidence from the U.S. Concert Industry." Strategic Management Journal (forthcoming).