Wednesday, 17 September 2014

Price discrimination in the car industry

Here's a fantastic demonstration of price discrimination in the light vehicles industry from  Ana Aizcorbe, Benjamin Bridgman, and Jeremy Nalewai

Prices for light vehicles tend
to fall over their model year, and retrace those declines
when next year’s models are introduced.
Using a new dataset, we document that the
characteristics of car buyers vary significan
tly over the model year as well: as average
prices of vehicles fall over the model year,
so does the average income of the buyers.
Under the assumption that income is negativ
ely correlated with price sensitivity, our
results show that price-insensitive consumer
s buy early in the model year, with more
price-sensitive consumers waiting until prices fall.
This empirical result suggests car de
alers engage in price skimming (i.e.
intertemporal price discrimination), introduci
ng new models at a high price, selling to
those willing to pay top dollar, and then loweri
ng the price to sell to the remaining market

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.