Used-Car Dealer Reputation: Pricing Evidence from the Wholesale Market

Finance

Speaker:Paul Brockman, Lehigh University
Date: Friday 13 March 2015

Further details

We examine the determinants of used-car prices in a dealer-to-dealer wholesale market using a large proprietary database of transaction-level data. One unique feature of this database is the inclusion of post-sale arbitration records that allows us to match buyer-initiated complaints to the selling dealer. We use these arbitration records to construct a dealer-specific reputation measure that is inversely related to the probability of entering into post-sale arbitration.

Our main empirical results show that buyers are willing to pay a statistically and economically significant price premium for an equivalent used car when transacting with a high-reputation seller. We investigate the dynamics of reputation building and find that, while reputations are relatively sticky, they can be altered substantially over the course of several weeks. Overall, our study provides new evidence on an effective counteracting mechanism that reduces the social costs of asymmetric information.

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