“One Discriminatory Rent” or “Double Jeopardy”: Multicomponent Negotiation for New Car Purchases

About half of new car transactions actually consist of two transactions, one in which the customer buys a new car from a dealer, and the other in which the customer sells his or her existing car to the dealer as a trade-in. At most dealerships, both the price of the new car and the price of the trade-in are negotiated. In such negotiations, as a general rule, car dealers are willing to trade off profits made on the new car versus profits made on the trade-in. To an economist, this suggests that the dealer may see the new car customer as the source of a certain amount of extractable profit—“one discriminatory rent”—that can be subdivided into two arbitrary buckets, the new car margin and the trade-in margin. Economic models of bargaining tend to use a similar paradigm, modeling the amount of total economic surplus created by the transaction, and supposing that each party will get a share of that surplus that is determined by the party’s bargaining power. It is usually recognized that there are multiple price mechanisms that could convey the same division of surplus to the two parties. If this is indeed a good description of how new car negotiations unfold, then an observer comparing a similar set of transactions should expect new car and trade-in profit margins to be negatively correlated. The better the deal the customer gets on a new car, the less good the deal one should expect the customer to get on the trade-in. An alternative view of this multicomponent negotiation is that customers or dealers—or competition and market structure