Intermediaries and Product Quality in Used Car Markets

72 Pages Posted: 20 Jul 2017 Last revised: 10 Jul 2019

See all articles by Gary Biglaiser

Gary Biglaiser

University of North Carolina

Fei Li

University of North Carolina (UNC) at Chapel Hill

Charles Murry

Boston College - Department of Economics

Yiyi Zhou

Stony Brook University

Date Written: July 8, 2019

Abstract

We examine used car dealers' roles as intermediaries. We present empirical evidence supporting that cars sold by dealers have higher quality: (1) dealer transaction prices are higher than private market prices and this dealer premium increases in the age of the car as a ratio and is hump-shaped in dollar value, and (2) used cars purchased from dealers are less likely to be resold immediately. We formalize a model to show that these empirical facts can be rationalized either when dealers serve to alleviate information asymmetry between sellers and buyers or when dealers facilitate assortative matching between heterogenous-quality cars and heterogeneous consumers. Lastly, based on predictions of the model, we use the data to distinguish these two theories and find evidence for both, but the preponderance of the evidence supports the asymmetric information theory.

Keywords: Adverse Selection, Middleman, Dealer, Information Intermediary, Used Car, Automobiles

JEL Classification: D82, D83, L15, L62

Suggested Citation

Biglaiser, Gary and Li, Fei and Murry, Charles and Zhou, Yiyi, Intermediaries and Product Quality in Used Car Markets (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=3003562 or http://dx.doi.org/10.2139/ssrn.3003562

Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
919-966-4884 (Phone)
919-966-4986 (Fax)

Fei Li (Contact Author)

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

Charles Murry

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Yiyi Zhou

Stony Brook University ( email )

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