The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis

Abstract

Cars are expensive and most consumers know to shop dealers for the best prices. Yet, there is little to no empirical evidence on the price effects of intra-brand competition among different dealer franchises for the same automobile model. In this paper, using large samples of transactions for ten of the most popular new cars purchased in the state of Texas for the years 2011, 2012, and 2013, we estimate the effects of intra-brand competition on new car prices. Intra-brand competition is measured as the distance (in miles) to the nearest same-brand dealer. Significantly, for all but one automobile model we consider in our empirical analysis, we find that intra-brand competition does, in fact, lower new car prices for consumers. For the popular Honda Accord, for example, increasing the distance between Honda dealerships by thirty miles raises the price paid by consumers by about $500. Given that retail margins on auto sales are quite small (about 6% on average), the price reductions resulting from intra-brand competition are substantial relative savings for new-car consumers. Moreover, we find that the price effects of intra-brand competition are relatively strong compared to inter-brand competition — at the sample means, moving an intra-brand dealer one mile closer reduces prices by the equivalent of an increase in 35 inter-brand rivals.