$1000 Cash Back: Asymmetric Information in Auto Manufaturer Promotions

58 Pages Posted: 22 Nov 2004 Last revised: 2 Apr 2021

See all articles by Meghan R. Busse

Meghan R. Busse

University of California, Berkeley - Haas School of Business

Florian Zettelmeyer

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

Jorge M. Silva-Risso

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

Date Written: November 2004

Abstract

Automobile manufacturers make frequent use of promotions that give cash-back payments. Two common types of cash-back promotions are rebates to customers, which are widely publicized to potential customers, and discounts to dealers, which are not publicized. While the payments nominally go entirely to one party or the other, the real division of the manufacturer-supplied surplus between dealer and customer depends on what price the two parties negotiate. These two types of promotions thus form a natural experiment of the effect of information asymmetry on bargaining outcomes: in the customer rebate case, the parties are symmetrically informed about the availability of the manufacturer-supplied surplus, while in the dealer discount case, the dealer will generally have an informational advantage. The aim of this paper is to compare, in appropriate settings and with appropriate controls, the price outcomes of transactions conducted under these two types of promotions in order to empirically quantify the effect of this information asymmetry. We show that customers obtain approximately 80% of the surplus in cases when they are likely to be well-informed about the promotion (customer rebate), and approximately 35% when they are likely to be uninformed (dealer discount). For a promotion of average size, this difference translates to customers being worse off by $500 when they do not know that the promotion is being offered.

Suggested Citation

Busse, Meghan R. and Zettelmeyer, Florian and Silva-Risso, Jorge M., $1000 Cash Back: Asymmetric Information in Auto Manufaturer Promotions (November 2004). NBER Working Paper No. w10887, Available at SSRN: https://ssrn.com/abstract=618569

Meghan R. Busse

University of California, Berkeley - Haas School of Business ( email )

2220 Piedmont Avenue, #1900
Berkeley, CA 94720-1900
United States
510-642-9489 (Phone)
510-643-5180 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/meghan/index.html

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)

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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