The migration has armed consumers with much more information and choices. It has done the same for dealerships.
By Jinjoo Lee of The WSJ. Excerpts:
"It used to be harder to tell if that cream puff was really a lemon.
In 1970, Nobel Prize-winning economist George Akerlof wrote about used-car markets to illustrate the problem of information asymmetry in markets: Sellers know a great deal more about the quality of their cars than buyers do, making it difficult for buyers to differentiate between low- and high-quality vehicles.
That information gap has narrowed over the years: In 1975, the Magnuson-Moss Warranty Act, also known as the Lemon Law, started requiring sellers of consumer products to provide detailed information about warranty coverage. Since 1985, the so-called Used Car Rule has required car dealers to display a window sticker with warranty information. Sellers have made it easier for consumers to pick out the highest-quality used cars by certifying cars that have been inspected and repaired. Services such as Carfax help consumers track vehicles’ history, and third-party resources such as Consumer Reports and J.D. Power help consumers suss out which vehicle models are more reliable than others."
Prospective buyers and sellers of used cars have more access to information than they have ever had. Online, consumers can look up not only the price, but how many of a particular vehicle model are available in the local market, how long the vehicle has been on the market and reviews of the dealerships themselves. CarGurus’ Zales said the platform has seen prices for similar vehicles converge over time.
“Dealers have to get as aggressive as possible, knowing that information is out there online,” he said.
A 2001 academic paper by lead author Florian Zettelmeyer, professor of marketing at Northwestern University’s Kellogg School of Management, illustrated this: New vehicle buyers who used an internet referral service paid 2.2% less for their car than those who didn’t.
That might seem like it is stacking the deck against dealers. It actually could help them earn more money. Dealers can use real-time market data to determine the optimal bidding price in wholesale auctions, for example. A McKinsey report by senior partner and lead author Ben Ellencweig analyzed 15,000 car transactions in 2022 and 2023, and estimated that dealers could expand their margins by 2 percentage points if they used real-time used-car-market pricing data to bid. That comes out to a $22 billion opportunity in the U.S. and Europe combined. McKinsey also estimated that dealers in the U.S. and Europe could collectively make $1.2 billion more by allocating used-car inventory to the right places around the country.
Online wholesale auctions should help. When wholesale car auctions were done in person, it limited the pool of buyers to dealers within a certain driving distance. This meant that, for instance, a used soft-top car sold in the winter in Massachusetts might be auctioned off to a low bidder nearby, when a dealer in Florida might have been willing to pay a higher price. Virtual auctions can remove that inefficiency."
"Asymmetric information" is a situation in which the seller knows more about a product than the
buyer (sometimes the buyer knows more about something important like how
healthy or risky they are as it relates to insurance). These markets do
not operate optimally. If insurance companies don't know how healthy or
risky you are, they can't be sure of how much your premiums should be.
So they try to find other information, like your occupation, that might
be correlated with your risk. My students might
recall I discussed this after we played the supply and demand game in
class. A good example is the used car market. Sellers usually know alot
more about the product than the buyers.
I play a game in class that touches on insurance. Click here to see the Lessons From the Supply and Demand Game.
Related posts:
Lose the Fat to Lower Your Insurance Rates
How Did Astronauts Of The 60s "Purchase" Life Insurance?
Should Overweight People Pay More For Health Insurance?
Should We Pay People To Adopt A Healthy Lifestyle?
'Spy car' worries raised by new Allstate patent
Should your company or insurer reward you for meeting exercise goals?
How insurance companies are using technology to better assess how risky customers might be
The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender
Some History of Insurance
Companies and governments are paying people to get healthy, and it works
Social media, insurance and asymmetric information
California to Toughen Rules on Group Discounts for Car Insurance
No comments:
Post a Comment