Used-car Market Research Articles

Simultaneous Signaling and Screening with Warranties

It is well known that sellers can use warranties to screen consumers and increase profits. The ability of warranties to signal is also well accepted. The author considers a situation in which a high quality seller needs warranty policy to both screen and signal. Through an analytical model, the objective is to identify the optimal strategy for a high quality seller that offers a base warranty and optional extended warranty for a product whose quality is not observable to buyers. The author finds that signaling can limit a seller's ability to screen, especially when buyers are willing to pay a significant premium for higher quality. To signal, the seller generally lengthens base warranties and shortens optional coverage, making the bundles for each type of buyer more and more similar. The author also provides an empirical application of the model in the Toronto used-car market.

Leasing, Lemons, and Buybacks

In his seminal article of 1970, Akerlof argued that the used-car market is not efficient because adverse selection causes too little trade. We construct a competitive model of the new- and used-car markets and investigate the relationship between new-car leasing and adverse selection. Our analysis yields a number of interesting results, including that new-car leasing reduces the adverse-selection problem, and that buybacks also increase efficiency in the secondhand market. We also discuss alternative explanations for new-car leasing and an explanation for the growth in new-car leasing during the last fifteen years. Copyright 2003 by the RAND Corporation.

Signal Facilitation: A Policy Response to Asymmetric Information

In cases of asymmetric information, policymakers sometimes want to make informed agents share their private information. One policy response to this situation is signal facilitation, altering the environment to encourage signaling. This article illustrates signal facilitation in the context of a competitive used-car market. Sellers may determine quality and reveal it through warranties. Signal facilitation compares favorably to a policy of mandatory disclosure because car dealers can refuse to test and signal if the cost is excessive. Also, this policy permits dealers to select less costly, less revealing alternatives that may enhance social welfare. Copyright 1992 by University of Chicago Press.