Monday, August 9, 2010

So you want to buy a Chevy Volt

Due to heavy demand, some dealers are marking up the retail price to $53K, well above the MSRP of only $41K.

This is a classic example of what economists call "double marginalization" or the "double markup" problem. It can also be characterized as a prisoners' dilemma between firms producing complementary pdocuts, i.e., manufacturers and dealers.  If manufacturers were allowed to control retail pricing, or could operate their own dealerships, these double markups would disappear. 

7 comments:

  1. Is it illegal for the car company to sell the cars directly over the internet?

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  2. @Doc Merlin

    It might be. I was just thinking of a similar situation today myself.

    I recently purchased Luke's Managerial Economics book for my upcoming course. My teacher requested that I purchase it bundled with the MBA Primer, however neither Amazon nor Barnes & Noble sell that version.

    I was wondering if the publisher sold it bundled online. Then I also wondered if they would sell it cheaper than a retailer. However, I don't think the publisher can sell the book to retailers expecting them to mark up the price while selling direct to customers at a lower price. There might be some anti-competition issues there.

    P.S. Luke--I'm really looking forward to reading your book this term. It looks like it will be very informative.

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  3. Doc Merlin - Generally, yes, see Bodisch, Gerald R. (2009). Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers. Retrieved 08/10/2010, from http://www.justice.gov/atr/public/eag/246374.htm


    Another solution in the case of the Volt would be GM using variable pricing, with the early units priced to capture the early adopter premium and decreasing as supply catches demand. But the current system allows GM to smuggly proclaim that the car has an MSRP of "around $40,000" while sales are executed $10k north of that amount.

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  4. I used to work with Gerry Bodisch at the DOJ. He helped me think through my first merger case.

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