Using a hedonic price model to test prospect theory assertions: The asymmetrical and nonlinear effect of reliability on used car prices

• The study provides new insights into the dynamics of used car markets.
• Empirically-determined marketing strategies for car retailers are exposed.
• The Prospect Theory framework is applied.
• The effects of vehicle reliability on used car prices are demonstrated.

This paper investigates prospect theory implications in used goods markets. In particular, it develops a hedonic price model that addresses the price structure of the used car market in the light of prospect theory. The proposed hedonic price model provides empirical evidence in support of prospect theory predictions for explaining used car prices after controlling for observed product differentiation. It is demonstrated that consumers are risk seeking when used car reliability is below the expected reference value and risk averse when used car reliability is above the expected reference value. The model also illustrates how car quality affects residual values and how buyers evaluate used cars.