Prices for light vehicles tendto fall over their model year, and retrace those declineswhen next year’s models are introduced.Using a new dataset, we document that thecharacteristics of car buyers vary significantly over the model year as well: as averageprices of vehicles fall over the model year,so does the average income of the buyers.Under the assumption that income is negatively correlated with price sensitivity, ourresults show that price-insensitive consumers buy early in the model year, with moreprice-sensitive consumers waiting until prices fall.This empirical result suggests car dealers engage in price skimming (i.e.intertemporal price discrimination), introducing new models at a high price, selling tothose willing to pay top dollar, and then lowering the price to sell to the remaining marketsegments.
What do they do?
1. they have detailed prices for light cars (for example a Honda Accord) in the U.S. from late 1999 to 2003. The price data gives average transaction prices, net of cash rebates and
financing incentives across all buyers in a month (consumers, firms and government).
2. this is then matched with data on on the characteristics of car buyers from surveys compiled by market data vendor NOPworld, including income surveys per buyer.
3. here's the key diagram. Prices fall for each model over the year until a new model is introduced. What happens to the buyer type? High income people buy first, price discrimination by income. Note they check that the early models are not the best appointed etc. so it really is the same car.