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Tuesday, December 24, 2013

Used Car Prices Aren't Sensible

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