Exploring New vs. Used Car Market Trends

Every year, new cars are produced with new “must-have” features. The fact that prices are changing a lot reveals the relevance of the equilibrium principle. Data shows that the old cars are lasting longer and that dealers do more than “sell cars”. Consideration of related markets reveals the relevance of the margins principle.

The Bureau of Transportation Statistics reports that the average age of a passenger car in the US was 9.1 years in 2000 and that, most recently, the average age is 14.5 years.

This change has occurred at the same time as the prices of new cars increased dramatically, to about US$50,000 from a little over US$30,000 in 2012. The prices of used car have dropped by about 10 percent since peaking during the pandemic.

At the same time, total sales of light vehicles (i.e., passenger cars, SUVs, light trucks) are down slightly in the US since 2016 -2019.

Explaining this price-quantity puzzle is not about cause-and-effect. It recognizes that price, quantity and quality are jointly determined by outside forces.

Normally, the fact that stuff is getting older leads forecasters to suggest that pent-up demand would “force” consumers to buy new (which would justify higher prices of new cars). That suggestion may have been relevant immediately after the pandemic but does not appear to be relevant currently.

The fact that the new and used car prices are trending in different directions is worth noting, since a new and used cars are very good substitutes for one another and since a general shift in the supply curve or the demand curve should affect both prices in the same direction.

An obvious explanation is that the new car premium increased because new cars became much better. The fact that people are choosing to drive cars for longer than in the past also suggests that they are more durable.

(Verifying this suggestion is complicated by the fact that people may be driving for longer because buying a new car is so expensive. This fact represents an oddity about the markets for durable goods: car manufacturers compete with themselves, in the used car market. The simple story with supply curves and demand curve needs to be made dynamic.)

Understanding that new cars are only one piece of the puzzle should spark your curiosity. Some buyers want the newest models even if it requires a lease or a loan. Car dealers like that opportunity. The common view is that dealers profit by exploiting unwary buyers when negotiating the price. The facts that new car dealers are tightly tied to specific manufacturers and that consumers can get a lot of pricing information online implies that manufacturers can easily extract excess profits from their dealers.

Financing is a big deal to a dealer. You should learn the tricks of financial arithmetic to avoid being deceived. Or confused: it is easy to lower the monthly payment (by extending the time used to repay the loan) and raise the total interest paid over the lifetime of the loan. Is that trade off acceptable to you?

Dealers should be very happy with the shift from new cars to older because it emphasizes a different margin for their business: maintenance or repairs. A “simple” car has become a rolling computer and fancier cars have more sensors which affect how the car operates. These changes may create a barrier to entry which protect big dealers from small shops and from people who want to do-it-yourself. Seeing a customer more often has the added benefit of helping a dealer to build a relationship, which may lead to future sales.

The car markets are interesting and I hope that these ideas are thought-provoking. I apologize for not mentioning the incredibly big elephant in the room: cross-ownership and partnerships amongst manufacturers (and amongst dealers) suggests that car markets are nothing like a perfectly competitive market.