Price dispersion in the used-car market

Abstract

What is the mechanism that produces variation in prices for the same good? Some economic theories propose that incomplete, asymmetric information between the buyer and the seller could capture this variation the best. Most notably, I discuss the applicability of information-driven models (e.g., Burdett and Judd, 1983; MacMinn, 1980; Reinganum, 1979) and imperfect information as a source of price dispersion in the used-car market. Another fundamental talking point overlapping with price dispersion has been the concept of price discrimination which implies a systematic effort to charge different consumer segments different prices for the same good. The literature review section seeks to shed light on the most prominent theories and empirical findings on price dispersion in various markets and applies that knowledge to the used-car market which has unique characteris-tics that make valuation mechanism for the good quite tricky. Additionally, I utilize that knowledge in the empirical work about the used-car market in Finland and work to distinguish some of the key components that influence price variation in used cars.