Buying and selling guitars

Denmark Street in London is in the heart of the City’s West End and has an iconic history as part of Britain’s music scene. The street's music connection dates back to the 1960s when many of its retail units were taken over by musical instrument shops, vinyl record stores and recording studios.

Famous artists and bands such as The Rolling Stones, David Bowie, the Sex Pistols, and Elton John could be regularly seen in the street where they wrote and recorded music. Today Denmark Street is the place in London to buy guitars and it features guitar shops like Music Matters Ltd, String King Guitar Works, Hank's Guitar Shop, Regent Sounds and Rose Morris. Like many musical instrument shops in the UK, the small independently owned guitar stores in Denmark Street have the characteristics of monopolistic competition.

The guitar shops in Denmark Street sell second-hand as well as new guitars and entering a guitar shop such as Hank’s or String King to trade in your old guitar or to buy a second-hand guitar puts most people in an asymmetric information situation. If you take your guitar to the shop to trade it in you will be offered a price based on the shop's valuation and the assistant in the shop will tend to know much more about your guitar’s valuation than you do. This means the shop is in a position where they could offer you a lower price than the true value of your guitar. You can find your way around this by doing some searches on Google or eBay but the shop might pick some ‘flaws’ in your instrument ‘the frets are worn’ to justify a lower value.

Similarly, when you go to buy one of their second-hand guitars the shop is likely to have much better information about the history of the instrument and its value than you do. Judging the value of a second-hand guitar is more difficult than a new guitar and second-hand or vintage guitars can be worth more than the instrument when it was new. When you see a 1958 Gibson Les Paul 'Burst' for $180,000 you need to have some good information about the product when you make your bid to buy it. Although in this case, a potential buyer is likely to be an experienced collector so the information situation may be more symmetrical. But with, for example, a $500 Fender on offer to an inexperienced buyer the information asymmetry may well favour the shop.

Music shops have done well in the UK over the last 2 years with a big rise in the number of people taking up musical instruments in the UK leading to an 80 per cent rise in the sale of instruments in 2021which was partly a consequence of Covid19 lock-downs, but the overall trend in the sale of instruments is increasing. Although a lot of the increase in the sales of guitars is online, the guitar shops in Denmark Street will be benefiting from the upward trend in demand.  

Possible questions to discuss with a class

Why might the guitar shops in Denmark Street be described as monopolistic competition?

What is the difference between symmetrical information and asymmetrical information in the guitar market?

Why might asymmetrical information lead to market failure in the second-hand guitar market?

What effect might the increase in demand for musical instruments have on the profits of the guitar shops on Denmark Street?