This project proposes to investigate incentive promotions in the US automotive industry. This is done through a program evaluation approach in which attention is paid to establishing a correct counterfactual outcome for each of the treatment conditions, and also to ruling out alternative explanations for any observed price and sales differences. The sales promotions are auto manufacturers' primary short-run competitive instrument and they are large in magnitude, averaging $2,566 per vehicle sold in May 2005. This project focuses on two of the most common types of incentive promotions: cash rebates to customers ("customer cash") and cash payments to dealers ("dealer cash").
Studying incentive promotions is of interest for three reasons. First, auto industry promotions are a useful setting for examining the effect of asymmetric information between buyers and sellers on negotiated prices. While the two bargaining parties are symmetrically informed about customer cash, the customer is typically uninformed about dealer cash. The first component of this study measures how much better consumers do in price negotiations when they are aware that manufacturer-supplied surplus is available to the negotiating parties. In preliminary estimates the effect of consumers' information disadvantage is substantial: for a promotion of average size, consumers obtain $500 less of the surplus if they do not know that the promotion is available.
Second, auto manufacturer promotions can be used to investigate how information differentially affects the prices negotiated by different types of consumers, in particular disadvantaged minorities. Previous empirical studies of automotive retailing have found significant differences in prices according to customers' demographic characteristics, especially race and gender (Ayres and Siegelman 1995, Scott Morton, Zettelmeyer, and Silva-Risso 2003). There is also evidence that knowing the reservation price of the opponent is more beneficial to consumers who feel disadvantaged in the bargaining process (Zettelmeyer, Scott Morton, and Silva-Risso 2006). The second component of the study investigates whether the information disadvantage of consumers regarding car manufacturer promotions affects disproportionately racial minorities and women, groups that are traditionally considered disadvantaged in the bargaining process.
The third component of the study is motivated by the 1995 settlement between the Department of Justice and the National Automobile Dealers Association, in which the association is said to have illegally pressured "manufacturers to give franchise dealers, rather than consumers, all of the discounts and incentives offered by manufacturers to induce the purchase of a new car," with the goal of limiting price competition in car sales to consumers. This third project investigates the settlement's implication that dealers and manufacturers have different preferences regarding the types of promotion that are offered, as well as what this implies about the vertical relationship between manufacturers and dealers.
The broader impact of this proposal is to provide evidence in a real-world setting of the importance of incomplete information on negotiated prices and its relation with customer characteristics. While economists commonly agree about the direction of the effects of incomplete information and consumer characteristics on bargaining outcomes, there is a lack of evidence that the effects are large enough to meaningfully influence market outcomes. A better understanding of the effect of incomplete information is important for policy makers in deciding on information disclosure policies and in facilitating information access to consumers.
