A Dynamic Determination of the Residual Product Value: Empirical Evidence from the Automotive Industry

Traditional management thinking and research has generally regarded the new and used durable goods markets as independent, addressing analytical issues in each in isolation. This static perspective however is limited, as in fact the new and used markets for durable goods should be linked in a dynamic fashion, and the actions in the market for new goods will have repercussions in the used goods market. These dynamic effects which have largely been ignored in the management literature, will be illustrated by quantifying the impact that sales incentives employed in the new market have on the residual values in the used market. We present estimates of the dynamic effect on the residual value of passenger cars; of sales incentives, as well as of model life cycles and product commonality. Our findings illustrate how incentivebased sales strategies may have little adverse impact on the residual values in the short term, but have a significant detrimental long-term effect, leading to a ‘mortgage’ on the future earnings of the manufacturer’s captive leasing operations.