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The Price of Cars

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My casual observation suggests to me two-and-a-half major developments in the automobile market that, I think, should have caused the prices of used cars to move closer to those of new cars.

First, major car makers (such as Ford and Toyota) now lend their names to used-car-sales efforts. For example, Ford now has an extensive advertising campaign on the radio boasting that it inspects, certifies, and warrants many used Fords for sale. (The term "used car," of course, is strictly avoided. "Pre-owned" is one of the favored euphemisms.)

Second, over the past quarter-century the quality of automobiles has skyrocketed. Compared even to the 1970s, it’s very rare for engines and transmissions to break down short of 100,000 miles. Indeed, even a modestly priced new car today doesn’t need its first tune-up until its been driven 100,000 miles.

The sight of cars stalled in traffic is unusual today; it was much more common twenty and more years ago.

Third, people don’t keep cars as long as they once did. It’s quite common today for middle-income Americans to buy a new car, drive it for three or four years without experiencing any real problems with it, and then trade it in for a new car.

As I’ll argue in moment, this third factor cuts both ways in my speculations about possible changes in the size of the price-gap between new cars and used cars. (This is why in my opening sentence I refer to "two-and-a-half major developments.")

The first development – more major-branding of used cars (and more advertising by major car makers of their used vehicles) – means that used-car buyers can better rely upon what they are told about the quality of used cars. Ford and Toyota don’t want to develop a reputation for lying about products sold under their labels. Compared, then, to the past when major automakers devoted less energy and resources to branding and warrantying their used cars, buyers today encounter fewer information differences as they explore the purchase of used cars and new cars.

The second development – much higher basic quality of cars, and the fact that cars now last longer – means that the quality difference between new cars and used cars is less than it was twenty or more years ago.

Both of these developments, ceteris paribus, should cause used-car prices to move closer to new-car prices.

The third development, though, cuts in both directions. On one hand, the fact that people don’t keep cars as long as they once did, despite the increasing quality of cars, suggests that Americans’ demand for new cars is higher than before and that their demand for used cars is lower. (This higher demand is likely driven by higher real incomes, with new cars being a normal good [2].) This fact, in turn, should (standing alone) increase the difference in price between new cars and used cars.

On the other hand, the fact that people don’t keep cars as long as they once did means that the used-cars now coming on to the market are newer than they were in years past – and, hence, they are less likely to be plagued with serious problems. This fact (standing alone) should decrease the difference in price between new cars and used cars.

Of course, there may well be other developments in the automobile market that I’m overlooking.

I have no data on what’s happened over the past quarter-century or so to new-car and used-car prices. Does anyone out there have such data? Just curious.

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