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"The Best Price You'll Ever Get": The 2005 Employee Discount Pricing Promotions in the U.S. Automobile Industry

Northwestern University and National Bureau of Economic Research, Northwestern University, Evanston, Illinois 60208
Massachusetts Institute of Technology, Cambridge, Massachusetts 02139
Northwestern University and National Bureau of Economic Research, Northwestern University, Evanston, Illinois 60208
m-busse{at}kellogg.northwestern.edu
simester{at}mit.edu
f-zettelmeyer{at}kellogg.northwestern.edu

During the summer of 2005, the three domestic U.S. automobile manufacturers offered a customer promotion that allowed customers to buy new cars using discount programs formerly offered only to employees. The initial months of the promotion were record sales months for each of the three firms, suggesting that customers thought that the prices offered during the promotion were particularly attractive. In reality, however, many customers paid higher prices under the employee discount pricing promotion. We propose that the promotion changed customers' beliefs about current versus future prices, convincing them to purchase during the promotion rather than delay in anticipation of future discounts. We investigate several alternative explanations for the simultaneous increase in prices and sales, including advertising, decreased financing costs, industry trends, disutility of bargaining, consumer differences, and changes in trade-in values. None of these explanations fully explains the concomitant increase in prices and sales.

Key Words: pricing; sales promotions; natural experiments
History: Received: December 20, 2007; accepted: May 4, 2009.