One Discriminatory Rent or Double Jeopardy: Multi-component Negotiation for New Car Purchases, American Economic Review
New car customers who use a trade-in engage in two transactions with a new car dealer; they buy new cars from the dealer and sell their existing cars to the dealer. Car dealers are willing to trade off profits made on the new car versus profits made on the trade-in. Customers may or may not view the transactions this way. In this paper, we investigate whether both parties view themselves as negotiating over a single surplus amount that can be divided across two transactions. If so, new car and trade-in profit margins should be be negatively correlated: the better the deal the customer gets on a new car, the less good deal one should expect the customer to get on the trade-in. An alternative is that customers or dealers or both view the transaction as two separate negotiations. If this is the case, then customers should either to do well in both the new car and the trade-in negotiations, or do poorly in both. If this is the case, then one should expect to see new car and trade-in margins be positively correlated, among similar transactions.
Meghan Busse, Jorge Silva-Risso
Busse, Meghan, and Jorge Silva-Risso. 2010. One Discriminatory Rent or Double Jeopardy: Multi-component Negotiation for New Car Purchases. American Economic Review. 100(2): 470-474.LINK