My final paper will focus on a discussion of the new and used auto markets. If you have any thoughts or comments about my topic, I’m all ears.
Cars are clearly a durable good, in that they (mostly) do not wear out quickly. As a result, a large secondary market for used cars allows consumers who wouldn’t normally be able to afford a vehicle to maximize their utility and preferences through a car that likely has a little less tread on the tires. The secondary auto market, more-so than most other secondary markets, is very competitive given the rapid technological advancements and the ease with which current owners can dispose of the cars they no longer prefer.
While a “fashion effect” exists in the new market (i.e. car manufacturers are able to charge a premium to early adopters of models), such an effect has not been shown in the secondary market. Instead, the used car market is subject to obsolescence and enhancement effects (i.e. the relative change in depreciation has a function of consumer preferences). What factors effect consumer preferences, prices, and demand in the used car market?
There is robust research on demand in the auto industry as a function of preferences, but a majority of the research focuses on the primary rather than secondary markets. This paper will attempt to examine the consumer’s perspectives of the used car market and the factors that influence their choices. These factors include, but are not limited to, product reliability, primary market prices, consumer knowledge/information, preferences, technological change, and the conditions of the primary market relative to the economy. I will also examine how adjustments and changes in the primary market for new cars leads to change in the secondary market, the level of efficiency in these adjustments, and the strategies employed by manufacturers to manage the demand for new cars through the used car market.
My paper is organized as follows…
Examining the Current State of the industry:
Ginter, J. L., Young, M. A., and Dickson, P. R. (1987). A Market Efficiency Study of Used Car Reliability and Prices. The Journal of Consumer Affairs, 21(2) 258-276.
Hortascu, A., G. Matvos, C. Syverson, and S. Venkataraman. (2010). “Are consumers affected by durable goods makers’ financial distress? The case of auto manufacturers.” Working paper, University of Chicago.
Levinthal, D. A., & Purohit, D. (1989). Durable goods and product obsolescence. Marketing Science, 8(1), 35-56.
Purohit, D. A. (1992). Exploring the Relationship between the Markets for New and Used Durable Goods: The Case of Automobiles. Marketing Science 11(2) 154–167.
Schiraldi, Pasquale. (2011). Automobile Replacement: A dynamic structural approach. RAND Journal of Economics, 42(2), 266-291.
Ted, H. C., & Su, Y. (2010). Will the U.S. auto market come back? Business Economics, 45(4), 253-265.
Wood, W. C. (1994). The cost of driving a car off the dealer’s lot. The Journal of Consumer Affairs, 28(1), 130-130.
Zeng, X., Dasgupta, S., & Charles, B. W. (2012). How good are you at getting a lower price? A field study of the US automobile market. Journal of Consumer Policy, 35(2), 255-274.
This is a particularly interesting topic given that this is about a choice that all consumers (who drive) will face. It definitely seems like there would be an inverse relationship between how the economy is performing and used car sales, that is a poor performing economy would increase used car sales. It is reassuring to see your analysis that you see a leveling and potential uptrend in new car sales, so hopefully this is a leading indicator that the economy overall will continue to see improvement and not dip into a double-dip recession, as you mentioned in your presentation.
I wonder if the developments of “greener” cars that use less gas will cause significant increases in demand for new cars. If people think they can save money in the long run off gas efficiency it seems to me they could want to buy a new car over an old one. Future higher real gas prices would increase the demand for efficiency.
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