Chapter 99 Question Eighty Nine

Why are nearly brand new used cars so much cheaper than real new cars? (George Aykerlof) Once a new car leaves the dealership's parking lot, the price immediately drops by more than 20%.Considering that today's cars generally have a service life of more than 200,000 miles, why would a few extra miles on the odometer bring down the price of a car? Part of the price drop reflects the difference in wholesale and retail prices.When a new car is sold for the first time, the buyer pays the retail price, which is about 15% higher than the wholesale price offered by the dealer.If a private consumer buys a car and then decides to sell it right away, he becomes an amateur car dealer.Of course he wanted to sell it for the original retail price as much as possible.But in the process of trying, he has to compete with a large number of professional dealers, who have bright and beautiful showrooms, employ experienced salesmen and maintenance mechanics, and because professional dealers are more likely to attract interested customers , as expected, private sellers are asking for lower prices.

There's another important reason why near-new used cars sell for much less than true new cars.Due to differences in manufacturing and assembly processes, when a new car rolls off the assembly line, the reliability of different cars is not exactly the same.This difference in reliability is magnified by differences in how different owners maintain their cars.Although some second-hand cars are new, they have defects, but even professionally trained repairers may not be able to distinguish them.As a result, owners generally know more about the condition of used cars than potential buyers. This information asymmetry has a huge impact on the price of used cars.Suppose a person thinks that a reliable used car is worth $20,000, and an unreliable used car is only worth $10,000; and assuming that half of the used cars are reliable, then the average value of all used cars becomes one.fifty thousand dollars.

Under such conditions, the price of a second-hand car will be lower than one.fifty thousand dollars.Wondering why?Let us assume that all used cars sell for one.fifty thousand dollars.So what kind of used car will sell at this price?As mentioned above, assuming that a reliable used car is valued at $20,000, the owner of a reliable used car would never ask for a lower price.Conversely, car owners who own unreliable used cars will be more than happy to buy them with a .Sell ​​it for $50,000 because they think their car is only worth $10,000.That is to say, only unreliable second-hand cars will be willing to pay for one.Selling for $50,000.Therefore, unless there is a big discount on the price of a used car, no one will be willing to buy it.

Of course, in reality, the reason why some second-hand cars change hands has nothing to do with the reliability of their performance.In this case, the seller will do his best to communicate why he is compelled to sell the car. (Because I was transferred to London by the company, I had to sell this Volvo or just had a baby, so I had to sell this Porsche.)