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My Two Cents

More Evidence Why the Big Three are in Trouble

Chris Farrell Jun 10, 2007

Remember the employee discount pricing come-on of the Big Three? Well, here’s more evidence why the Big Three auto companies are in trouble.

During the summer of 2005, the Big Three U.S. automobile manufacturers offered a customer promotion that allowed customers to buy new cars at the discounted price formerly offered only to employees. The initial months of the promotion were record sales months for each of the Big Three firms, suggesting that customers thought that the prices offered during the promotions were particularly attractive. In fact, such large rebates had been available before the employee discount promotion that many customers paid higher prices following the introduction of the promotions than they would have in the weeks just before. We hypothesize that the complex nature of auto prices, the fact that prices are negotiated rather than posted, and the fact that buyers do not participate frequently in the market leads customers to rely on “price cues” in evaluating how good current prices are. We argue that the employee discount pricing promotions were price cues, and that customers responded to the promotions as a signal that prices were discounted.

That’s from the abstract to the new National Bureau of Economic Research paper, “‘The Best Price You’ll Ever Get’ The 2005 Employee Discount Pricing Promotions in the U.S. Auto Industry.” It’s by economists Meghan R. Busse, Duncan Simester and Florian Zettelmeyer.

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