Other Unpublished Work | 2012

Invest in It or Wing It? The Value of Informed Pricing in the Secondary Market

by Guofang Huang, Hong Luo and Jing Xia

Abstract

This paper studies the managerial problem of dynamic pricing in the secondary durable-goods market, where sellers typically have limited information about item-specific heterogeneity. It develops a structural model of dynamic pricing that features the seller learning about item-specific demand through initial assessment and active learning in the sale process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the dealer's initial information about item-specific demand and of lowering the price-adjustment cost. With the dealer's average net profit per car in the estimation sample being around $740, the initial information about item-specific demand worth roughly $243, and cutting the dealer's price-adjustment cost by half would increase its profit by about $103.

Keywords: Information; Demand and Consumers; Goods and Commodities; Value; Asset Pricing; Auto Industry; Retail Industry;

Citation:

Huang, Guofang, Hong Luo, and Jing Xia. "Invest in It or Wing It? The Value of Informed Pricing in the Secondary Market." 2012.