Essays on Price Discrimination, Information Sharing and R&D Return

Though haggling has been the conventional way for auto retailers to sell their cars, the last two decades have witnessed the systematic adoption of no-haggle prices by many large dealerships, including the largest used car dealership, Carmax. This paper develops a structural empirical model to estimate dealers’ profits under posted price and haggling and investigate the conditions leading to the heterogenous choices of pricing policies that we observe. The model incorporates a simple class of bargaining mechanisms into the standard BLP model. With the extension, the paper is able to estimate the product-level demand system using data with only list prices and estimate the discounts achieved in haggling. The counterfactual experiments based on the estimates yield a few interesting findings. First, dealers using posted price would see their profits increase only slightly if they haggled, whereas the haggling dealers’ profits would drop significantly if they switched to posting prices. Second, the market power enjoyed by the nonhaggling dealerships through vertical differentiation and carrying large number of models is a major factor contributing to the variation in the relative performance of posted price and haggling.