'The Best Price You'll Ever Get': The 2005 Employee Discount Pricing Promotions in the U.S. Automobile Industry

Abstract

During the summer of 2005, the three domestic U.S. automobile manufacturers offered a customer promotion that allowed customers to buy new cars at the discounted price formerly offered only to employees. The initial months of the promotion were record sales months for each of the three firms, suggesting that customers thought that the prices offered during the promotions were particularly attractive. In fact, many customers paid higher prices following the introduction of the promotions than they could have, had they bought in the weeks just before. We fail to find evidence that the simultaneous increase in prices and sales is due to advertising, decreased financing costs, industry trends, or other explanations. We conclude that the most likely explanation is that the promotion changed customers' beliefs about current versus future prices, convincing them to purchase during the promotion rather than delay in anticipation of future discounts. We present several scenarios that could lead to such beliefs.

Keywords: automobile pricing, price signal, promotion, search, information

JEL Classification: L11, L62, D83