One Price And Efficient Market

Before launching Evenlevel.com I did a decent amount of research on price differences between wholesale and retail markets. On average, I found MMR to be about $4,000 less than the average listed retail price on Autotrader.com. That was a pretty big difference, and the price difference showed me we had a good market opportunity.

The price difference occurred because of friction in the marketplace, friction that existed because of legislation. Legislation isn’t the only source of friction in the used car market.

Geography and distance also create pricing disparities. If the retail used car market were efficient used car prices would differ only by an average cost of shipping. Instead median car prices can vary by thousands of dollars. Given how much consumers focus on price as a primary selling point, why do price differences persist?

I have a couple thoughts but I am curious to hear what others think, let me know.

3 responses to “One Price And Efficient Market

  1. Auction + retail prices and vehicle condition are NOT comparable.

    Wholesale and retail is not the same in any industry + especially not so in automotive.

    Wholesale vehicles have not necessarily been reconditioned up to retail standards. Quite often they are still in “as is” or “as traded in” condition.

    Most dealerships “recondition” all incoming used vehicles to the tune of $500-$2,000+ once they obtain them from an auction, wholesaler, or trade in and their estimated amount of reconditioning factors in to the price they will pay for the vehicle in question.

    That is not a “market inefficiency.”

    Nor is the difference in retail vs. wholesale markup. Running a retail facility involves real estate (the dealership), lighting, sales people, floor planning costs (financing the cars), etc. The retail vs. wholesale price is what pays for that. Again, that is not a market inefficiency.

    Did I misunderstand the definition and what was meant?

  2. Brian,

    No, you’re right about cars needing to be reconditioned, certainly something I found out a little too late.

    When I think of inefficiency in the wholesale to retail market I think of an artificially limited pool of buyers. If the wholesale market were opened up to retail consumers there would be a lot more buyers, driving up the price.

    I did some research on geographic pricing differences though, price differences between the median price of a car in several different cities, and found some big variations, as much as $5k.

    Consumers always talk about price, so I was surprised those differences existed. Why wouldn’t more consumers buy cars across country to save $5k?

  3. You said “Consumers always talk about price, so I was surprised those differences existed. Why wouldn’t more consumers buy cars across country to save $5k?”

    That’s a great question. I’ve done it. If I can save $3000 on a car I have no problem flying out of state and driving it 1000 miles home.

    I think for the most part, people aren’t willing to do it because it’s inconvenient. I’ve got the luxury of being able to take off at the drop of a hat, whereas most people would have to take time off from work, away from their family, etc. To them, the savings isn’t justified by the time they’d have to give up, plus the very important aspect of not being able to kick the tires before you hop on that plane to get the car.

    Some of the dealers are taking advantage of customer behavior by getting the vehicles from other geographic regions. That just means more profit for the dealers. I know the Mini Cooper is one car that West Coast dealers will purchase from the East Coast at/near retail prices because there is such high demand for them in their area.

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