Intermediaries and product quality in used car markets

Abstract

We present empirical evidence supporting that used cars sold by dealers have higher quality: (i) dealer transaction prices are higher than unmediated market prices, and this dealer premium increases in the age of the car as a ratio and is hump‐shaped in dollar value, and (ii) used cars purchased from dealers are less likely to be resold. In a model, we show that these empirical facts can be rationalized either when dealers alleviate information asymmetry, or when dealers facilitate assortative matching. The model predictions allow us to distinguish these two theories in the data, and we find evidence for both.

Two-sided markets, pricing, and network effects

“…Thus, matching by intermediaries and matching to intermediaries together causes low prices in the bilateral market. Biglaiser, Li, Murry, and Zhou (2020) also highlight selection effects when dealers compete with bilateral bargaining in the context of used cars. They use pricing patterns to infer the importance of addressing asymmetric information in explaining the prevalence of dealers.…”

Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects

“…This paper also contributes more broadly to the literatures on auto markets. While dealer revenues from auto-loan intermediation are substantial (Davis, 2012), the literature on competition in auto markets has largely abstracted from dealer loan intermediation and the implied joint pricing of cars and loans (Berry et al, 1995, Morton et al, 2001, 2003, Gavazza et al, 2014, Nurski and Verboven, 2016, Murry, 2017, Biglaiser et al, 2019. 5 We complement these studies by accounting for the strategic considerations that arise from the joint pricing of cars and car loans.…”

Inventory Management in Decentralized Markets

“…Because of our choice of vehicle segment, we also ignore issues related to asymmetric information. Although used cars are the canonical example of a lemons market, there is more recent research that suggests that asymmetric information problems are not severe, particularly for late model vehicles-see Adams et al (2011) and Biglaiser et al (2020). Used-car dealers have a variety of channels to acquire inventories, including trade-in of new buyers, participating auctions, etc.…”

“…1 Moreover, the used-car 1 We do not consider adverse selection in this article. Although used cars are the canonical example of a lemons market (Akerlof, 1970), there is more recent research that suggests asymmetric information problems are not severe, particularly for late model vehicles-see Adams et al (2011) and Biglaiser et al (2020). Also, a literature on informational intermediaries demonstrates that, both theoretically and empirically, one of the most important functions of car dealers is to mitigate (if not fully resolve) information asymmetry between buyers and sellers.…”

“…Also, a literature on informational intermediaries demonstrates that, both theoretically and empirically, one of the most important functions of car dealers is to mitigate (if not fully resolve) information asymmetry between buyers and sellers. See, for example, Biglaiser (1993), Lizzeri (1999), Biglaiser and Li (2018), and Biglaiser et al (2020). The basic argument is that dealers have the expertise to effectively detect lemons, and they have the incentive not to sell lemons due to the standard reputation concerns.…”