Best PracticesDealership Operations & Processes

Is There a Mis-Pricing Epidemic In The Used Car Market?

If anyone knows me they know I love data visualizations.  Frankly, I think graphs tell a better story than most bloggers or writers.  I came across this gem and had to hear what the automotive community thought.

Pricing vehicles to market has been a long trend in our industry and in 2011 some incredibly smart folks studied some 22 million used car transactions and found clear drops in price at every 10,000 mile interval.  What is even more interesting is they estimate the financial impact of this mis-pricing is about $2.4 billion of financial missed opportunity.

Take a look at this graph. It details the average sales price of a used car based on the mileage. Links to the source and original blog can be found at the bottom of this post.

used car mis-pricing graph

Those gaps represent missed financial opportunity.  While we can all admit 39,520 miles seems lower than 41,235 miles, we can all agree the price difference should not be in the many hundreds to nearly a thousand dollars.  This trend continues well past the standard warranty periods.

So, what is the underlying reason behind this mis-pricing? Given the lack of market transparency in 2011 and still today, does this prove more reliance on gut than understanding true competitive data sets?

And, what are other important questions to answer given this data for a Used Car Manager to be successful today?

I’ve copied and pasted the explanation forwarded to me found in the Economic Psychology Policy Blog HERE

From the blog…

(9) Lacetera, Pope & Sydnor (2011), Heuristic Thinking and Limited Attention in the Car Market, NBER Working Paper.

Devin Pope sent this blockbuster of a graph. The authors investigated whether people use heuristics when buying a used car – specifically whether potential buyers focus on the left-most digit in the odometer in purchase decisions. The graph uses a data-set of over 22 million used-car transactions and shows large, discontinuous drops in sales prices at 10,000 mile intervals in odometer mileage, as well as smaller drops in 1,000 mile thresholds. Because of the difference between observed sales prices and the prices expected if people were fully paying attention instead of using heuristic based judgment, the authors estimate that there is around $2.4 billion worth of mispricing in the market.