Strategic Exclusion of the Highest-Valued Bidders in Wholesale Automobile Auctions

26 Pages Posted: 4 Jul 2012 Last revised: 5 Jun 2013

See all articles by Robert G. Hammond

Robert G. Hammond

North Carolina State University

Thayer Morrill

North Carolina State University - Department of Economics

Date Written: June 5, 2013

Abstract

By restricting bidders to be qualified dealers, wholesale automobile auctions exclude the bidders who place the highest value on the vehicles: consumers. This paper provides an explanation for this puzzling entry restriction by modeling the inventory-management decision of a firm. If an automobile dealer has more vehicles in inventory than is optimal, it cannot reduce its inventory by selling directly to consumers without impacting the demand for the automobiles that remain. However, if the dealer sells its excess inventory to a competitor, the demand for its remaining vehicles increases as the competitor responds by acquiring fewer additional vehicles. We demonstrate that for any market demand function and any cost of the competitor acquiring additional vehicles, a dealer with excess inventory does better by selling a subset of its vehicles to a competitor rather than directly to consumers. We discuss the market for wholesale automobiles in relation to other markets where goods are also auctioned but where entry is not restricted to qualified dealers. Doing so allows us to compare our inventory-management explanation to common explanations provided by industry practitioners. We find that intuitive alternative stories do not consistently explain practices across markets.

Keywords: auctions, entry restrictions, inventories, automobiles

JEL Classification: D44, L11, L62

Suggested Citation

Hammond, Robert G. and Morrill, Thayer, Strategic Exclusion of the Highest-Valued Bidders in Wholesale Automobile Auctions (June 5, 2013). Available at SSRN: https://ssrn.com/abstract=2099878 or http://dx.doi.org/10.2139/ssrn.2099878

Robert G. Hammond (Contact Author)

North Carolina State University ( email )

Raleigh, NC 27695-8110
United States

HOME PAGE: http://www4.ncsu.edu/~rghammon/

Thayer Morrill

North Carolina State University - Department of Economics ( email )

Raleigh, NC 27695-8110
United States

HOME PAGE: http://thayermorrill.com

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