Limited Attention in the Car Market
Cars with odometer values between 79,900 and 79,999 miles on average are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899.
People often use simple cognitive shortcuts when processing information, which leads to systematic biases in their decision making. These biases can persist in and affect the functioning of markets that are highly competitive, even those involving high-stakes goods, sophisticated players, and elaborate decision processes. In Heuristic Thinking and Limited Attention in the Car Market (NBER Working Paper No. 17030), authors Nicola Lacetera, Devin Pope, and Justin Sydnor focus on the used car market and ask whether it is affected by consumers exhibiting a heuristic, or short cut, known as left-digit bias: the tendency to focus on the left-most digit of a number while partially ignoring other digits.
Using data that come from wholesale auctions encompassing more than 22 million used car transactions, the authors document significant price drops at each 10,000-mile threshold from 10,000 to 100,000 miles, ranging from about $150 to $200. For example, cars with odometer values between 79,900 and 79,999 miles, on average, are sold for approximately $210 more than cars with odometer values between 80,000 and 80,100 miles, but for only $10 less than cars with odometer readings between 79,800 and 79,899. The authors also find price drops at 1,000-mile thresholds, but these changes are smaller.
This apparent left-digit bias not only influences wholesale prices but also affects supply decisions. If sellers are savvy and are aware of these effects, then they will have an incentive to bring cars to auction before the vehicle's mileage crosses a threshold. Indeed, the authors show that there are large volume spikes in cars before 10,000-mile thresholds.
The authors discuss whether the effects they find are driven by the wholesale buyers and sellers or by the final customers. A range of evidence - including the volume patterns just described, the purchase patterns for experienced versus inexperienced dealers at the auctions, and data from an online retail used-car market -- suggests that the price patterns described here reflect inattention primarily on the part of the final buyers of used cars, and not on the part of the agents who participate at the wholesale auctions.
--Lester PickerThe Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.