How sellers react when competitors go out of business
Dealerships near closing car lots raise prices less than those farther away
- When Chrysler closed a quarter of its US dealerships in 2009, local competitors raised their prices, according to research by Chicago Booth’s Pradeep K. Chintagunta, Georgia Tech’s Cem Ozturk, and University of North Carolina’s Sriram Venkataraman.
- Car prices rose by $594 on average at dealerships within 30 miles of a closed Chrysler lot, but prices at dealers within 10 miles of a closed dealership rose by $265 on average, while prices for the same set of cars at dealers farther away increased by much more (see chart).
- Competing car dealers may want to cluster together, to benefit from shoppers concentrating their search in one location. But the benefits of clustering diminish when a dealership closes, which limits price increases at rival dealerships closest to the closed lot.
- The dealers’ price reactions varied by car and country of origin. Prices for luxury cars and Asian brands didn’t increase as much as prices for vehicles such as trucks, vans, or wagons, and domestic brands, which are closer substitutes for Chrysler’s cars.