Meghan R. Busse, Nicola Lacetera, Devin G. Pope, Jorge Silva-Risso, and Justin R. Sydnor. “Estimating the Effect of Salience in Wholesale and Retail Car Markets.” American Economic Review 103(3): 575-79, 2013 [pdf].
• People have limited attention, and hence, even the provision of full information might not lead to “optimal” decision making.
• Retail prices for used cars show a significant discontinuity when the mileage on those cars passes from 9,999 to 10,000 miles; similar discontinuities exist at higher multiples of 10,000, too. Apparently buyers focus on the left-most digit of the mileage, and pay less than full heed to the other digits, so they overpay for a car with 69,950 miles on it, for instance. The overpayment is significant, on the order of $300.
• Car owners respond to this bias by trading in their cars at a higher rate before they reach milestones such as 50,000 miles. That is, left-digit bias affects not only prices of used cars, but also the composition of used cars offered for sale.
• Wholesale prices for used cars show similar price discontinuities at major milestones, but these seem largely to be reflecting the retail effects of left-digit inattention.
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