Quantifying Bargaining Power Under Incomplete Information: A Supply-Side Analysis of the Used-Car Industry

63 Pages Posted: 22 Dec 2021

See all articles by Bradley Larsen

Bradley Larsen

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); eBay Research Labs

Anthony Lee Zhang

University of Chicago - Booth School of Business

Date Written: November 29, 2021

Abstract

This study quantifies bargaining power in supply-side negotiations with incomplete information, where car dealers negotiate inventory prices with large sellers at wholesale used-car auctions. We measure an agent's bargaining power in an incomplete-information setting as the fraction of the agent's take-it-or-leave-it-offer payoff she receives. We propose a direct-mechanism method for estimating a seller's private value, interpreting it as the gradient of a menu from which the seller chooses her secret reserve price. We find that, on average, dealerships (buyers) have a similar degree of bargaining power as sellers. For manufacturer sellers, or sales with substantial buyer competition, sellers' bargaining power is much higher.

Keywords: Bargaining power, auto industry, incomplete information, vertical relationships, Revelation Principle

JEL Classification: C57, C78, D44, D82, L10, L14, L62

Suggested Citation

Larsen, Bradley and Zhang, Anthony Lee, Quantifying Bargaining Power Under Incomplete Information: A Supply-Side Analysis of the Used-Car Industry (November 29, 2021). Available at SSRN: https://ssrn.com/abstract=3990290 or http://dx.doi.org/10.2139/ssrn.3990290

Bradley Larsen

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

HOME PAGE: http://www.stanford.edu/~bjlarsen/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

eBay Research Labs ( email )

2065 Hamilton Avenue
San Jose, CA
United States

Anthony Lee Zhang (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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