How Market Power Affects Dynamic Pricing: Evidence from Inventory Fluctuations at Car Dealerships

Ayelet Israeli (), Fiona Scott-Morton (), Jorge Silva-Risso () and Florian Zettelmeyer ()
Additional contact information
Ayelet Israeli: Harvard University, Boston, Massachusetts 02163
Fiona Scott-Morton: Yale University, New Haven, Connecticut 06520; National Bureau of Economic Research, Cambridge, Massachusetts 02138
Jorge Silva-Risso: University of California, Riverside, Riverside, California 92521
Florian Zettelmeyer: National Bureau of Economic Research, Cambridge, Massachusetts 02138; Northwestern University Evanston, Illinois 60208

Management Science, 2022, vol. 68, issue 2, 895-916

Abstract: This paper investigates empirically the effect of market power on dynamic pricing in the presence of inventories. Our setting is the auto retail industry; we analyze how automotive dealerships adjust prices to inventory levels under varying degrees of market power. We first establish that inventory fluctuations create scarcity rents for cars that are in short supply. We then show that dealers’ ability to adjust prices in response to inventory depends on their market power, that is, the quantity of substitute inventory in their selling area. Specifically, we show that the slope of the price–inventory relationship (higher inventory lowers prices) is significantly steeper when dealers find themselves in a situation of high rather than low market power. A dealership with high market power moving from a situation of inventory shortage to a median inventory level lowers transaction prices by about 0.57% ceteris paribus, corresponding to 32.5% of dealers’ average per-vehicle profit margin or $145.6 on the average car. Conversely, when competition is more intense, moving from inventory shortage to a median inventory level lowers transaction prices by about 0.35% ceteris paribus, corresponding to 20.2% of dealers’ average per-vehicle profit margin or $90.9. To our knowledge, we are the first to empirically show that market power affects firms’ ability to dynamically price.

Keywords: marketing; pricing; price discrimination; inventory production; dynamic pricing; automobile industry; market power (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2021.3967 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:2:p:895-916

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().