If you’ve ever traded in your car at an auto dealership, chances are you’ve been a victim of price discrimination. A new study published in The Journal of Industrial Economics shows, “buyers with a trade-in pay an average of $990 more than those who do not trade in1”. How can that be? The concept of trading in your car at a dealership is to lower the total amount paid for a new vehicle, so how do trade-in customers end up paying more than those negotiating with cash?
“buyers with a trade-in pay an average of $990 more than those who do not trade in their used cars1"
The researchers were able to prove that auto dealers judge how much money a buyer is willing to pay for a new car, not only on his or her decision to trade in a car, but also its make, model and condition. Using this information they make assumptions about the customer and can discriminate against them by offering less of a discount on the new car, meaning customers who trade in pay an average of $990 more than customers buying the car outright.
Apparently not! Here's what the researchers found when people traded in their car for another car from the same manufacturer:
"The findings from our empirical analysis support our theory of trade-in inferences. First, buyers with a trade-in pay an average of $990 more than those who do not trade in their used cars. Second, compared to a buyer who trades in a vehicle of a different make and model, a buyer pays $150 if the trade-in is the same make and $214 more if it is the same make and model as the newly purchased car.1"
It turns out that consumers who purchase the same make as the car they are trading in end up paying an additional $1,140 for the convenience of trading in. Trading in for the same make and model could cost you even more - potentially as much as $1,204. Why? Trading in your car for a similar model tells the dealership that you were happy with your previous purchase and aren't at risk of buying a competitor’s vehicle. Dealers assume you’re less likely to negotiate on price and more likely to accept their low offer.
The easiest way to avoid dealer trade-in price discrimination is not to trade in. Selling your car to webuyanycar.com is a great alternative to trading in.
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To get a copy of the full study featured in The Journal of Industrial Economics please click here.
1 Kwon, O., Dukes, A. J., Siddarth, S. and Silva-Risso, J. M. (2015), The Informational Role of Product Trade-Ins for Pricing Durable Goods. The Journal of Industrial Economics, 63: 736–762. doi: 10.1111/joie.12090