eBay has just announced that during a 180-day pilot it will allow digital music files for download. “Pre-approved” resellers will be able to offer downloadable music within auctions at eBay. Is this the beginning of a legal secondary market for digital media?

This article gives a brief background on the legal and technological requirements to resell digital media items and on the economic implications of such a possibility.

"Secondary markets lead to more competition in the market, as the supplier of the primary market has to compete with its own products offered on the secondary market. Without this competition, primary market suppliers have an incentive to offer products at higher prices resulting in a lower level of economic welfare.

A secondary market leads to a better allocation of items among consumers.

From an individual, but also from a macro-economic perspective, it is only reasonable to sell property, which is not to be used anymore and which other consumers are willing to pay for.

Secondary markets extend the affordability of media items to the public.

“Used” or older media items are typically being sold at lower prices leading to a situation of natural price discrimination. People, who can afford it, purchase items earlier on the primary market and people with a lower willingness to pay are able to buy media items on the secondary market.

Secondary markets extend the availability of media items.

For instance, media items can be accessed through a secondary market long after they are “out of print” or withdrawn from primary markets.

...Most American and European music download services explicitly exclude the option for consumers to resell media items in their terms of sale. Thus, consumers who purchase physical media items, such as CDs, and those who acquire digital media items by downloading are treated differently.

The reason why consumers can resell physical media items, lies in a principle, which in U.S. copyright law is called the first sale doctrine, but also exists in a similar form in EU copyright law. Originally, copyright holders are given an exclusive right to (re-)distribute media items. However, this exclusive right is limited by law, in order to balance the interests between copyright holders and consumers, who purchase media items. Once sold to consumers for the first time, the exclusive right of the copyright holder to (re-)distribute the media item concerned exhausts. As a consequence, owners of CDs, DVDs or books can resell or give away their property without asking the copyright holder for permission.

...the right to resell goods is an essential consumer right and – not least – one of the pillars of the social market economy.

The non-existence of secondary markets for digital media can lead to an unbalanced and non-efficient supply of goods.

The more the whole media market is shifting from physical to digital media, the more impact a non-existence of secondary markets in the digital era will have."

A truly interesting, well researched and superbly written paper by Lutz Niehüser, research assistant at the chair for information systems at the European Business School, Oestrich-Winkel, Germany.

Recommended.