STRATEGIC EXCLUSION OF THE HIGHEST-VALUED BIDDERS IN WHOLESALE AUTOMOBILE AUCTIONS

Robert Hammond and Thayer Morrill

Economic Inquiry, 2014, vol. 52, issue 3, 1219-1230

Abstract: type="main" xml:lang="en">

By restricting bidders to be qualified dealers, wholesale automobile auctions exclude the bidders who place the highest value on the vehicles: consumers. This article provides an explanation for this puzzling entry restriction by modeling the inventory-management decisions of a firm. If an automobile dealer has more vehicles in inventory than is optimal, it cannot reduce its inventory by selling directly to consumers without impacting the demand for the automobiles that remain. However, if the dealer sells his/her excess inventory to a competitor, the demand for his/her remaining vehicles increases as the competitor responds by acquiring fewer additional vehicles. We demonstrate that for any market demand function and any cost of the competitor acquiring additional vehicles, a dealer with excess inventory does better by selling a subset of its vehicles to a competitor rather than directly to consumers. We discuss the market for wholesale automobiles in relation to other markets where goods are also auctioned but where entry is not restricted to qualified dealers. Doing so allows us to compare our inventory-management explanation to common explanations provided by industry practitioners. We find that intuitive alternative stories do not consistently explain practices across markets. (JEL D44, L11, L62)

Date: 2014
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