How car dealers adjust prices to reach the product efficiency frontier in the Spanish automobile market

This paper investigates the relationship between the dynamics of price discounts at the dealership level and product efficiency in the Spanish auto market. Using data envelopment analysis (DEA), product efficiency scores are estimated for 2092 different vehicles commercialized during 2010, using an innovative database that accounts for more than 75 technical attributes of each model. By alternating official and discounted prices on the DEA specification, we are able to propose a measure of competitive improvement in the retailing stage. We also introduce a decomposition of this measure into two indices that account for the “commercial effort” made by the dealer and the “intensification of competition” that results from the discounting efforts of the other dealers. Finally, we explore the importance of a number of drivers of dealer discounts. As expected, the results confirm the existence of an inverse relationship between product efficiency and dealer discount. Also as expected, discounts are significantly larger for generalist brands, aged models and gasoline engines.