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A Surprising Car Fact

Oct 1, 2011 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Labor, Thinking Economically • 245 Views    No Comments

2 car price facts:

    • A car whose mileage is 79,900 will cost approximately $10 less than one with 79,800.
    • A car whose mileage is 80,000 will cost approximately $210 less than one with 79,900.

      For both, the rise was 100 miles. But the drop in price at wholesale car auctions was very different. Why?

      The reason is left digit bias.

      Defined in the NBER Digest, left digit bias is “the tendency to focus on the left-most digit of a number while partially ignoring other digits.” Briefly discussed here and then considered in detail in this NBER paper, left digit bias affects the demand and supply sides of used car auction markets. Wholesale car buyers tend to pay much less at 10,000 mile thresholds. Predictably, auto dealers try to avoid 10,000 mile thresholds.

      While the authors of this study focused on wholesale used car auctions, they believe their conclusions have broader implications. They ask whether a similar bias could affect admissions decisions, treatment of medical results, and even a response to government spending programs

      The Economic Lesson

      There are 5 determinants that can change our demand and shift the position of a demand curve. They include changes in…

      • income
      • substitutes
      • complements
      • utility and taste
      • number of buyers

      The utility for a car that crosses a 10,000 mile threshold will tend to diminish. As a result, demand will decrease and price will descend.

      An Economic Question: Where have you seen left digit bias affect prices?

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