Many video game retailers who specialize in video game sales offer trade-in programs. Wouldn’t they be cannibalizing their business for new titles?
When the market for video game rentals appeared, retailers had to compete with a product (rented games) which had a high degree of substitution for what they sold new. The only real difference between the retailer and the renter was a level of ownership and selection.
Video games have a rapid decline in play value (marginal benefit) after a certain point. Once this happens the consumer will look to purchase a new game. With a trade-in system the marginal cost of buying a new video game becomes reduced as the consumer now has the option of trading in a game which no longer gives them marginal benefit (enjoyment of play) that exceeds their marginal cost (time to play it). The retailer is giving the option of turning part of the buyer’s sunk cost (purchase price of the old game) into a reduction of marginal cost for their next purchase.
It extends even further because the retailer is now buying from one consumer and selling to another consumer directly instead utilizing a third party producer. This allows the retailer to realize a greater overall profit. A buyer who has $100 to spend on video games could buy 2 new games for $50 each which the retailer has purchased from the producer of the games for $30 each. The retailer nets $40 profit and the consumer is able to play two video games.
With a trade-in program the buyer purchases the first video game for $50, then trades it back in for $10 of store-only credit. Store-only credit encourages buyers to return to utilize unused store credit and ensure maximum profit since it can only be spent with the retailer. The consumer then purchases another used game for $20 (which the retailer purchased from another game consumer for $10), the marginal cost for a new (used) game is now $10. The buyer can now repeat the process a total of 5 times. Each time the retailer buys and then sells a used video game they net $10 for a total of $50 from the five used game transactions (the game they buy they sell to another buyer). Now the retailer has netted $20 on the original game and $50 from the used game transactions for a total of $70 profit and the consumer gets to play 6 video games. The only one who has lost anything is the original producer of the game.
This also allows the retailer to provide a supply at a lower price and capture more of the buyers in the marketplace. For example, they will now attract the consumer that will pay $49 or below for a video game but not $50 per game. This also allows the video game retailer to offer a wider selection at a range of pricing, including older titles that may no longer be in current production. Here, the retailer is price targeting the individual consumer.