Inventory Fluctuations and Price Discrimination: The Determinants of Price Variation in Car Retailing∗

We show that variation in prices for new cars are in part the result of scarcity rents. Consistent with theoretical predictions, a dealership moving from a situation of shortage to one of ample inventory lowers transaction prices by about 1% ceteris paribus, or $230 on the average car. Shorter resupply times also decrease transaction prices for cars in excess demand. Transaction prices for cars in excess supply are more responsive to inventory variables at the end of the model year. Consumers pay lower prices when dealers’ total inventory is high and when inventory of the purchased car at neighboring dealers is relatively high. For traditional dealerships, inventory explains 21% of the combined inventory and demographic components of the predicted price. For so-called “no-haggle” dealerships, the percentage explained by inventory increases to 51% (for Autonation dealers) and 65% (for Saturn dealer).