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Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships

  • Florian Zettelmeyer
  • Fiona Scott Morton
  • Jorge Silva-Risso
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    Price variation for identical cars at the same dealership is commonly assumed to arise because dealers with market power are able to price discriminate among their customers. In this paper we show that while price discrimination may be one element of price variation, price variation also arises from inventory fluctuations. Inventory fluctuations create scarcity rents for cars that are in short supply. The price variation due to inventory fluctuations thus functions to efficiently allocate particular cars that are in restricted supply to those customers who value them most highly. Our empirical results show that a dealership moving from a situation of inventory shortage to an average inventory level lowers transaction prices by about 1% ceteris paribus, corresponding to 15% of dealers' average per vehicle profit margin or $250 on the average car. Shorter resupply times also decrease transaction prices for cars in high demand. For traditional dealerships, inventory explains 49% of the combined inventory and demographic components of the predicted price. For so-called 'no-haggle' dealerships, the percentage explained by inventory increases to 74%.

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    File URL: http://www.nber.org/papers/w12177.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12177.

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    Date of creation: May 2006
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    Handle: RePEc:nbr:nberwo:12177
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    1. Bresnahan, Timothy F & Ramey, Valerie A, 1994. "Output Fluctuations at the Plant Level," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 593-624, August.
    2. Adam Copeland & George Hall, 2005. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," Cowles Foundation Discussion Papers 1543, Cowles Foundation for Research in Economics, Yale University.
    3. Copeland, Adam & Hall, George J., 2005. "Prices, Production and Inventories over the Automotive Model Year," Working Papers 2, Yale University, Department of Economics.
    4. Guillermo Gallego & Garrett van Ryzin, 1994. "Optimal Dynamic Pricing of Inventories with Stochastic Demand over Finite Horizons," Management Science, INFORMS, vol. 40(8), pages 999-1020, August.
    5. George Hall & John Rust, 1999. "An Empirical Model of Inventory Investment by Durable Commodity Intermediaries," Macroeconomics 9904005, EconWPA.
    6. Jason D. Papastavrou & Srikanth Rajagopalan & Anton J. Kleywegt, 1996. "The Dynamic and Stochastic Knapsack Problem with Deadlines," Management Science, INFORMS, vol. 42(12), pages 1706-1718, December.
    7. Fiona Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2003. "Consumer Information and Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities?," Quantitative Marketing and Economics, Springer, vol. 1(1), pages 65-92, March.
    8. Severin Borenstein & Nancy L. Rose, 1991. "Competition and Price Dispersion in the U.S. Airline Industry," NBER Working Papers 3785, National Bureau of Economic Research, Inc.
    9. James D. Dana, 2000. "Competition in Price and Availability when Availability is Unobservable," Econometric Society World Congress 2000 Contributed Papers 1450, Econometric Society.
    10. Carlton, Dennis W, 1978. "Market Behavior with Demand Uncertainty and Price Inflexibility," American Economic Review, American Economic Association, vol. 68(4), pages 571-87, September.
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