When to Haggle, When to Hold Firm? Lessons from the Used Car Retail Market

Abstract

Though haggling has been the conventional way for auto retailers to sell cars, the last two decades have witnessed the systematic adoption of no-haggle prices by many large dealerships, including the largest new car and used car dealership chains. This paper develops a structural empirical model to estimate sellers' profits under posted price and haggling, and investigates how market conditions affect sellers' optimal pricing formats. The model incorporates a simple class of bargaining mechanisms into a standard random-coefficient discrete choice model. With the extension, the product-level demand system is estimated using data with only list prices, and the unobserved price discounts are also recovered in the estimation. The counterfactual experiments yield a few interesting findings. First, dealers' adopted pricing formats seem superior to the alternative ones. Second, dealers enjoying larger market power through vertical differentiation and carrying a large number of models are more likely to have posted price as their optimal pricing format.