Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships

46 Pages Posted: 22 May 2006 Last revised: 10 Oct 2022

See all articles by Florian Zettelmeyer

Florian Zettelmeyer

University of California, Berkeley - Marketing Group; National Bureau of Economic Research (NBER)

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Date Written: May 2006

Abstract

Price variation for identical cars at the same dealership is commonly assumed to arise because dealers with market power are able to price discriminate among their customers. In this paper we show that while price discrimination may be one element of price variation, price variation also arises from inventory fluctuations. Inventory fluctuations create scarcity rents for cars that are in short supply. The price variation due to inventory fluctuations thus functions to efficiently allocate particular cars that are in restricted supply to those customers who value them most highly. Our empirical results show that a dealership moving from a situation of inventory shortage to an average inventory level lowers transaction prices by about 1% ceteris paribus, corresponding to 15% of dealers' average per vehicle profit margin or $250 on the average car. Shorter resupply times also decrease transaction prices for cars in high demand. For traditional dealerships, inventory explains 49% of the combined inventory and demographic components of the predicted price. For so-called 'no-haggle' dealerships, the percentage explained by inventory increases to 74%.

Suggested Citation

Zettelmeyer, Florian and Scott Morton, Fiona M. and Silva-Risso, Jorge M., Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships (May 2006). NBER Working Paper No. w12177, Available at SSRN: https://ssrn.com/abstract=900083

Florian Zettelmeyer (Contact Author)

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-643-1898 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

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Fiona M. Scott Morton

Yale School of Management ( email )

493 College St
New Haven, CT CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

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