You must reply to at least three colleagues in a manner that extends the discussion. A simple “I agree/disagree” will not be accepted. respond in a manner that further extends the discussion.
40 years ago, buying and selling a car was likely more straight-forward than it is now, at least it probably seemed to be. Now, we have many more options from brands to models to features. Technology is the one thing that has allowed consumers to keep up, mainly in the way that has given people the ability to do extensive research on vehicles prior to purchasing them. However, technology has not just been given to the consumer, as it has also been given to the seller, and this is where the article from 40 years ago stays relevant. A dealership has access to more specialized databases and screening technology than does the average consumer. With this, the dealership can still know more than the buyer. The question is whether the buyer can overcome this information asymmetry by doing enough research. This goes for both the new and used markets because dealerships will always be one step ahead since they will always know where the vehicle came from and have a professional network to determine the vehicles value and reliability.
With that being said, buying a new car offers the advantage of knowing where the vehicle came from as no other person has used it the components are new and unused and mechanical issues are less likely. In this way, any issues that arise can be more easily traced to the seller, making the seller bear more risk for the vehicle. This advantage, however, would automatically create the disadvantage of making the car less desirable to a secondary buyer. There would now be a line of owners, if even just one, and tracing the value of the vehicle based on its history will then become more complex, driving down the value because there is less room for guarantees. In this way, buying a used car places more risk on the buyer since fewer guarantees can be given. The buyer would then have to be compensated with a lower price for the vehicle when compared to the lack of quality guarantee.
This exercise did actually alter my perspective on the financial practicality of buying a used car versus buying a new car. In summary, just because the internet says to buy used in order to save money and avoid extreme depreciation, does not mean this is the case for every circumstance. I was surprised to see that the 2016 vehicle ended up costing more in total in the long-run. This particular case would have given me an easy decision to buy the 2021 model. However, this is for a reliable brand and model. Things may very well change with different brands, particularly with models that may not be designed to last for very long. A Ferrari is likely not going to be driven to and from work every single day, but a Honda would be. Ironically, the more expensive car would be designed to be driven less, so we must also take into account practicality, a somewhat abstract cost or advantage. Also, a car with fewer safety features may be much cheaper, but then the buyer is taking on risk to health and safety, which some say is invaluable or very expensive and otherwise difficult to measure. We would also have to consider outside economic factors such as vehicle part supply chains, gas prices, and the rate of inflation which is where the 4% discount rate comes in, covering a large rise in inflation that banks would use as a baseline rate for any type of loan. Overall, this exercise showed that there is no one size fits all strategy to buying a car.
The article regarding the used car market as well as the asymmetric information seems still applicable even after 40 years when the article was published. . The asymmetric information leads to adverse selection (Daisuke Ikeda, 2019) where the side of market with less information has an inferior selection from which to choose. Nowadays, consumers do not need to physically go to a 4S store or a car dealer to choose the models. Instead, because of the internet and big data, consumers who wish to buy a used car can compare different models along with different dealers in just one click. However, although consumers today have much more information than those 40 years ago, the market to the consumers is still less transparent than that to the suppliers, which means the asymmetric information does still exist in a used car and certified car market.
After reading the article, I understand the asymmetric information in a car market, or even in other markets cannot be completely eliminated. The only way to decrease the asymmetric information is to compare across different dealers and calculate the real costs beyond the quoted prices. Before reading this article, I prefer a certified used car because I believe the safety certificates that the dealer provided and I would like to enjoy the low prices of the used cars. However, because of the asymmetric information, there are many potential costs and concerns of buying a used car. Therefore, it worth to be more careful when buying a new car.
Buying a new car has many advantages. First, compared to the used cars, new cars have the most updated features and can be fully customized to your own preference. Second, new cars have lower depreciation cost and lower insurance expense per year. Third, it take less time to choose, because one you decide the model you want, you can just buy the car with any dealer. While the only disadvantage of buying a new car is the new cars are much more expensive than a used car as well as the corresponding sales tax. A new vehicle can lose to up 20% of value once it departs the store.
Buy a used car will save much money for the consumers. It also has less customization costs and insurance premium. However, the used cars may not be as reliable as you thought and they may lead to a higher potential costs.
After researching for Honda Accord, I was surprised that the used car seems to has a lower upfront cost but ends up with a higher total costs in 5 years. Given that Honda Accord is the most reliable cars on the market, most of the other used cars will cost even higher than a new car. The 4% is used to account for the effect of inflation.
Questions for reflection on Market for Lemons
Information asymmetries can destroy markets if the difference in knowledge between the buyer and seller is too great. This article was written 40 years ago. What changes in the used and new car markets have helped reduce information asymmetries? Information. Today we have online tools like that of Edmunds, CarFax, Carvana, and other online tools to allow buyers to see what has really happened in the life of a car. In the last 40 years since the article was written, the article discusses the economic impact of poor quality and the risk of the loss of an entire industry. I was born in 1975, and as a big car buff thanks to my Uncle Bill at an early age, foreign quality in the eighties and 1990s began to pressure US manufacturers to improve quality or go out of business. We now see truly little difference today between quality of affordable cars between domestic and foreign competition dues to the quality of improvement across the industry. We can find these quality and design challenges in the stories of Ford, Chrysler, and GM over the last 30 years.
Do information asymmetries exist today in the used or certified car market? Not as much, unless you are buying from a small used car dealer who has not adapted to the times with technology and count on ignorance of buyers. We have a few of these in Lancaster County and they are the same people who own them, but have to continue overtime to operate under different names because they sell lemons. Being in the used car capital of the world with the Manheim Auto Auction and several clients in this business I tend to know more about used car market than I care to know. Certified Pre-owned and longer warranties for used cars have also reduced the number of information asymmetries in todays car world.
Has this article changed the way you think about buying a car? No. I buy new because of the warranties and the amount of computer systems that are in cars today. They have great warranties, often manufacturers like BMW offer free service under warranty, no cost of oil changes, much more through loyalty discounts.
What are the advantages and disadvantages of buying a new car? Advantages are new technology integration with the smart phone has become exceedingly popular, better financing options (0% financing), lesser maintenance, depending on the make and the safety technologies can carry lesser cost of insurance. Disadvantages it will cost a bit more than a quality certified pre-owned on price, but as we learned in the excel exercise, not that much more. What is peace of mind worth to the buyer?
What are the advantages and disadvantages of buying a used car? Advantages are upfront cost is less. Disadvantages are less attractive financing options, higher maintenance, greater probability technology is outdated or needs upgraded due to overuse, higher credit costs, and also the risk newer models body styles are changed causing quicker depreciation than originally anticipated.