I don't normally link to other blogs, but here is a neat little post on a behavioral economics study of discontinuity in used car prices. There's no particular reason a car with 49,900 miles should be much different from one with 50,100 miles. But that's not what we actually observe. Pricenomics calls attention to a paper by Devin Pope, Meghan Busse, Nicola Lacetera, Jorge Silva-Risso, and Justin Sydnor (2013). "Estimating the Effect of Salience in Wholesale and Retail Car Markets." American Economic Review Papers and Proceedings (103(3): 570-74. As Pricenomies summarizes it in "How We Misprice Used Cars":
The researchers attribute the mispricing to “left-digit bias”. Buyers try to simplify the information available to them by only focusing on what they deem most relevant. And this bias represents $2.4 billion worth of mispricing.
Actually, the paper itself is quite readable. As the co-authors phrase it:
Modern economic life requires individuals to evaluate many pieces of decision-relevant information every day. A growing body of evidence shows that not all information is equally salient to consumers.1 This is the case even for large-scale purchases made in well-functioning markets such as the market for automobiles...
The short paper above draws on the following, which presents the empirical details of their statistical tests for "irrational" pricing: Nicola Lacetera, Devin G. Pope, and Justin R. Sydnor (2012). "Heuristic Thinking and Limited Attention in the Car Market." American Economic Review 102(5): 2206–2236. That longer article is very much aimed at specialists. Thus prose such as the following:
Motivated
by the literature on regression discontinuity designs (see Lee and Lemieux 2010 for
an overview), we employ the following regression specification:
mike smitka
I haven't yet read the piece... I'm going there now.... but I wonder if these guys ever attended an auto auction, the true heartbeat of the auto business. Values are set based on competitive bid. ON the retail side, the Internet has done quite a job influencing pricing, as well as the normal negotiation process that takes place. More comments after I read their paper.
ReplyDeleteI now have a better idea of what the authors are observing. Yes, it has always been the case in my 40 plus years in the car business that mileage carries with it a psychological impact on price more so than a realistic impact. But it is what it is. In Japan, most Japanese believe a vehicle is "worn out" once the factory warranty runs out at 50K kilometers, about 26K miles. Luxury vehicles are often worth more as scrap than as complete vehicles at 50K kilometers. Many Japanese used vehicles are purchased at open bid auction and shipped around the world. I recall sitting in traffic in Barbados looking at a Toyota Surf in front of me. On the back hatch was a dealer label from my client in Nagano Japan. My dry cleaner in the U.S., born and raised in Pakistan, used to buy used vehicles at wholesale in Japan and ship them to the middle east. Anywhere the steering wheel is on the right side of the vehicle is a market for Japanese cars simply because of an irrational zeitgeist in that country about the value of a vehicle based on mileage. So any country colonized by the Brits is a candidate. Many go to Australia.
ReplyDeleteSo one has to agree with their conclusion. If you are a seller, sell before you reach the next 10K mile plateau. If you are a buyer, you can probably get a better deal negotiating the price of a vehicle just over the plateau.
David, thanks! Cognitive psychology / psychological economists has found many examples of this sort of behavior. I mean, people play state lotteries, which offer a payout that is horrible – and that's before taxes. Then there are people who will drive long distances rather than fly, despite the significantly higher risks. People who don't get vaccinated for flu, or who don't buy health insurance [a US thing, other countries prevent such stupidity]. The list goes on. In general people are very bad at figuring odds.
DeleteSome are not sensible I agree...
ReplyDelete