Measuring the Impact of Negative Demand Shocks on Car Dealer Networks

The goal of this paper is to study the behavior of consumers, dealers, and manufacturers in the car sector and present an approach that can be used by managers and policy makers to investigate the impact of significant demand shocks on profits, prices, and dealer networks. More specifically, we investigate consumer demand, substitution patterns, and price decisions across different cars and dealer locations to identify dealerships with low margins or high fixed costs and measure the value of closing down dealerships for manufacturers. We apply our model empirically to the San Diego area using a transactional data set with information about the locations of dealers and consumers, as well as manufacturer and retail prices. We find strong consumer disutility for travel and find that dealers have local demand areas that are shared with a small set of competitors. We show that a reduction of market demand by 30% over two years, similar to the economic crisis of 2008.2009, results in an annual drop in prices of approximately 11%. We discuss this price drop in the context of the 2009 federal policy measure known as the Car Allowance Rebate System program. We compare predictions and actual dealership closings in the General Motors and Chrysler dealer networks as an application of our approach.