Car Mileage and Market Prices: An Asymptotic Negative Relationship - Statistics Project Example

Are old cars always more convenient for consumers?” An analytical and market based approach taking into account used 3 years old medium segment vehicles. Car Mileage and Market Prices: an asymptotic negative relationship March 2013 Students: • Executive Summary This report aims at analyzing on a comprehensive basis the major elements and characteristics of the used cars market, in light of the main evidences stemming from an analytical perspective: An accurate overview of recent data acquired through technical analysis makes us possible to infer some major element and factor that influences the pricing mechanism within the used car market: specific aim of this work is to shed light on the existing relationship that emerges between car’s mileage and demanded price by retailers and private owners; More in details, we concentrate our analysis on a sample of 30 used cars, of year 2009, from the medium segment, more precisely: • Alfa Romeo MiTo 1.4 70 cv 8v Progression • Toyota Yaris 1.0 3p Active • Nissan Micra 1.2 12v 5p Acenta • Audi A3 1.2 3p Young A detailed quantitative approach, supported and implemented by technical and graphical representations through MS excel, makes us possible to infer two important factors: From one side evidence has been found supporting the belief that there is an inverse relationship between car mileage levels and prices demanded for these models, also on a short to medium term perspective (the 3 year old models are a necessary element in this sense). On the other side, as also the optimized graphical analysis through MS excel assesses, this relation tends to be asymptotic, with older car models showing a more pronounced trend toward lower prices, that is attenuated for newer models with less mileages. • Introduction Aim of this research assignment will be to understand and infer the right pricing mechanism that emerges from the analysis of some recent automotive models, in light of the effect on price given by factors like mileage (x) and asking price (y). This problem can be considered of primary importance, due to the fact that major improvements in the sale of used cars have been carried out in the marketplace, and more and more car drivers are interested in the features of this market itself. In addition to this, the capacity to improve the liquidity of this market can make possible for car drivers to improve the brand loyalty and market power as well. A comprehensive review of recent data, and pricing characteristics for the major models we have chosen to analyzed, will be also presented in an effective way. An accurate modeling capability has made us possible to estimate a proper price equation, that will be presented in the body of the work, together with a review of major success factors and limitations of the model itself. The model developed under the given assumptions complies with all the major real characteristics of this market as evidenced by statistics on a broader basis, together with all the major findings on an academic perspective. The results highlighted in this work make possible to improve the existing body of Literature, in light of the accurate and comprehensive graphical analysis and overview of the recent problems in this sense concerning used cars market, and the price-mileage relationship. The results meet therefore the expectations, that favored the negative relationship between car model mileages and their prices, supporting the evidence that mileage, more than care age, can be seen as the major factor in order to quantify the decrease in prices for used cars in the sample. • Literature review The state of the art literature makes possible to see how the used car market has received many explicit citation and has been a primary object of analysis during the last decade: Important studies and achievements highlight how an efficient and effective used car market can improve and maximize the consumer’s utility rates as well as their market power. Our analysis takes into account a 30 used car sample, that stem from the medium segment, and reflect a major and comprehensive 5-car sample, heterogeneous in all its primary qualities, and composed by the following models: Alfa Romeo MiTo 1.4 70 cv 8v Progression Toyota Yaris 1.0 3p Active Nissan Micra 1.2 12v 5p Acenta Audi A3 1.2 3p Young A more detailed approach to data analysis makes possible to see how used cars, that have traditionally been excluded by many analyses for revenues feasibility, and didn’t catch the attention of the mainstream body of literature. It’s however important to underline how factors like improved quality and better reliability of used cars can potentially create a devoted customer base in this sense. Accurate models for the used automotive markets have already highlighted how despite the main presence of negative externalities such as transaction costs and less transparency, there is still a possible and concrete possibility for car dealers to profit from used car deals in a more pronounced way. Our work builds on these main evidences from the literature, and on the recent data on used car deals and ongoing prices for these models, in a market that has improved its liquidity. Best practices analysis and an enriched technical approach make possible for this work to set itself on the same pattern of research of the cited and renown works and analytical statistics as well. • Project Work As requested and accurately anticipated, this research, on the basis of recent evidences on a statistic perspective and in light of data for used cars, aims at assessing a standardized pricing mechanism for the following models chosen: • Alfa Romeo MiTo 1.4 70 cv 8v Progression • Toyota Yaris 1.0 3p Active • Nissan Micra 1.2 12v 5p Acenta • Audi A3 1.2 3p Young This choice of 4 sample models (and 30 examples for their prices) represent a diversified car model portfolio, since it is related to different car companies, and different models that can be seen as attractive for specific heterogeneous market segments. Our analysis for used cars, taking into account the current offering for these models, has been carried out in order to avoid price misalignments dependent on specific car features (e.g. certain colors are preferred, or certain optional tools are much more regarded for certain car types), and focuses on some model that in terms of liquidity and market presence rank high, so that the main caveats of the analysis can be adopted on a broader basis. The research on these models has made possible to reach important and evident characteristics and has led to the results synthesized in the following table, where for each model we can find double indications: on the left we see information concerning mileage, and on the right column we can find the respective prices. In order to gain appropriate and reliable results about the cost of the cars with respect to their mileage an extensive research was carried out, primarily through the country best car selling websites. The popularity of the websites and their online reviews suggested the reliability of their prices. After going through the results thoroughly the following table was produced. ALFA ROMEO MITO 1.4 70 CV 8V PROGRESSION Price (£) Mileage (miles) TOYOTA YARIS 1.0 3P ACTIVE Price (£) Mileage (miles) 12.780 25.000 8.500 36.780 10.250 36.000 7.557 50.000 9.777 58.000 8.700 45.000 13.020 10.000 11.800 15.000 12.850 10.999 12.000 5.000 10.500 39.800 9.900 40.000 11.470 42.000 7.500 52.000 NISSAN MICRA 1.2 12V 5P ACENTA Price (£) Mileage (miles) AUDI A3 1.2 3P YOUNG Price (£) Mileage (miles) 12.500 7.000 16.500 18.520 10.250 19.585 14.950 47.000 14.250 2.500 11.500 104.000 10.500 15.520 18.400 10.000 13.050 20.000 14.999 25.450 12.800 18.640 12.000 75.000 8.200 78.000 16.500 36.000 9.050 56.000 14.800 65.200 **Results take into account the price demanded for the used model (left column), together with a comprehensive information with respect to its mileage (right column). We assume that car dealers apply the more general principle of good faith and reasonable care when they set binding contracts and prices with their clients, with respect to factors like mileage (x) and asking price (y). Our analysis shows some most important factors at a preliminary perspective: • Prices and mileage levels show an inverse relationship, so that in general terms higher prices are found for cars with low mileage levels and viceversa; • Our evidence supports the fact that this inverse relationship tends to show asymptotic behaviours, where prices decline more consistently when mileage tends to be high, while remaining quite constant when mileage is low. The following reasoning and analytical results are consistent with the major evidences from the body of Literature, that confirm the belief that a trend toward lower uncertainty levels and more transparency is taking place within the used automotive market. These findings are verified for all four models, as shown graphically through our model here below: Table 1 to 4: graphical representation of mileage and pricing behaviors Evidence on our Excel statistics confirm the inverse relationship between price and mileage, so that when the pricing line for the model is low (red line), the Mileage one tends to be high, and viceversa. More in details, we can see that in our model the slope of the line determines also a general formula, according to which the price optimization value can be determined as the following regression analysis for the four given models: P(x) = a^1*X^1 + a^2*X^2 +e Where: “a” are weighting coefficients X^1 is the mileage coefficient [estimated between 1.2 and 1.35] X^2 is the asymptotic coefficient [estimated in 0.5 to 0.7 for mileages under 50.000, and from 0.85 to 1.1 for higher mileage levels] E is the error term The model is statistically significant, and respects the given indications and evidences from the market elements for these models, as also the graphical representation for the price – mileage interaction confirms • Results and recommendations This work, in light of the major evidences from the used automotive market, analyzes data concerning mileage and prices for 30 deals concerning 4 major visible models, in order to investigate some major issue and findings for this market. This same work sheds light on some major technical aspects of the pricing mechanisms developed and adopted on large scale within this market, and after a general review of the major primary factors that are believed to play a consistent role in shaping the automotive market, focuses on the major and primary factor that is believed to shape and deeply influence the pricing mechanism on a broader scale: the car’s mileage level. An accurate graphical and technical analysis has been carried out through the intensive usage of MS Excel optimization tools, so that a comprehensive analysis of pricing levels for the four car types taken into account for this research have been represented for each car class, in order to analyze the relationship miles-prices, and to investigate the main technical characteristics of this strong relationship. Evidences has been discussed and highlight two major elements: • There is broad evidence on the inverse relation between price levels and mileage records. • There is explicit evidence on the asymptotic behavior of this relationship, so that prices are less elastic to mileage levels when those are low, while this relationship and its trend is more pronounced for higher mileage levels. Graphical results have been collected for all four considered models; a comprehensive example where these results are mostly evidenced is given by the Audi A3 example, that follows here below: The recommendations and the major caveats that can emerge from this analysis are related to the major necessary characteristics for the functioning of this market, in order to fully understand the potential of an effective used automotive market. This same market has shown improved liquidity levels and, higher transparency and less uncertainty levels during recent times, and it’s widely believed that in the next years improved quality levels can make the findings of this work much more pronounced. • Conclusions Aim of this work has been related to the capacity to carry out a comprehensive analysis of the major aspects and technicalities concerning the used car market, together with a major discussion of the primary factors that influence the pricing behaviors through major market based evidences on an analytical approach. The analysis takes into account an analytical approach based on 30 used car deals, with respect to 4 major models (Alfa Romeo MiTo 1.4 70 cv 8v Progression / Toyota Yaris 1.0 3p Active / Nissan Micra 1.2 12v 5p Acenta / Audi A3 1.2 3p Young). Accurate technical analyses have been related to the graphical representation obtained through MS Excel, that confirm two important findings in the field of analysis concerning the relationship between mileage levels and pricing levels: • The relationship prices-mileage levels is negative, and the two variables, as also graphical representations confirm, are inversely related. • The same relation doesn’t follow an homogeneous pattern, but rather assumes the characteristics of an asymptotic curve, where the inverse relationship prices-mileage levels is more pronounced for higher mileage levels, and less evident for lower level examples. Mileage levels are therefore considered a primary critical factor for what concerns used automotive pricing mechanisms, in more explicit terms than the age variable; The major findings of this model are confirmed on a practical and graphical perspective, and building on recent evidences from the body of literature, this work complies with the major existing research patterns in this sense as well. REFERENCES • Shamsuddoha, Mohammad, Alamgir, Mohammed, Nasir, Tasnuba and Nedelea, Alexandru, Influence of Brand Name on Consumer Decision Making Process - An Empirical Study on Car Buyers (March 5, 2010). Va Trimitem Atasat, Vol. 10, No. 2, p. 12, 2010. Available at SSRN: http://ssrn.com/abstract=1778163 • Woodham, Richard and Weill, Peter, Manheim Interactive: Selling Cars Online (August 2001). MIT Sloan Working Paper No. 4160-01. Available at SSRN: http://ssrn.com/abstract=305713 or http://dx.doi.org/10.2139/ssrn.305713 • Duvan, Bora Selce and Ozturkcan, Selcen, Used Car Remarketing (July 1, 2009). International Conference on Social Sciences (ICSS), September 10-13, 2009, Izmir, Turkey. Available at SSRN: http://ssrn.com/abstract=1435184 • Schiraldi, Pasquale, Automobile Replacement: A Dynamic Structural Approach (January 28, 2011). RAND Journal of Economics, Vol. 42, No. 2, 2011. Available at SSRN: http://ssrn.com/abstract=1350034 or http://dx.doi.org/10.2139/ssrn.1350034 • www.quattroruote.it • Raviv, Yaron, Uncertainty and Auction Outcome: Evidence from Used Car Actions (April 15, 2006). Available at SSRN: http://ssrn.com/abstract=905584 or http://dx.doi.org/10.2139/ssrn.905584 Read More