Newswise — If you are shopping for a deal on a car, it's best to go where you have plenty of choice — and competition.
Wait until a dealership closes and prices will go up, leaving you looking harder for a deal. But where you should look might surprise you. According to research from the University of Chicago Booth School of Business, when Chrysler closed a quarter of its dealerships as part of its bankruptcy filing in 2009, prices within a sales area went up the least at the dealerships nearest to the closed one.
In his working paper, "Competitive Reaction of Incumbents to Exits: Chrysler's Auto Bailout-Induced Dealer Consolidation," Professor Pradeep Chintagunta analyzed data from individual dealerships — sales and inventory numbers of every car on the lots — for competing retailers before and after a nearby Chrysler dealership closed, and found that the dealerships nearest the closed Chrysler lots were limited in how much they could raise their prices.
Typically, he noted, a decrease in competition allows retailers to raise their prices, but the nearby dealerships had to limit those increases in order to attract customers because comparison shopping was no longer as easy as it had been before.
"It's now becoming more expensive for consumers to come to this area because they'll have to make a special trip just for the Honda dealership, that essentially raises the cost to the consumer of coming to this location," Chintagunta says. "In a sense, what the dealership has to do is buy off this cost that the customer has to invest in having to drive to this location which has only, for example, a Honda dealership, and that gets the dealership to actually lower its prices."
Chintagunta looked at different bands of dealerships in relation to the closed Chrysler retailers — within 10 miles, 10 to 20 miles and 20 to 30 miles — and found that the best deals were at dealerships in the innermost perimeter, and that the biggest price increases were in the intermediate distance band.
"There is still enough competitive pressure that prices don’t go up a whole lot," he says. "You probably want to go to a dealership located right next to the closing Chrysler dealership if you want to get the lowest price."