Car Dealership Markups

Abstract: The scope of this analysis is to evaluate what may affect the percentage markup on new and used cars sold by dealerships across the United States. The essay will also take into account shocks to market demand and supply as relevant factors that may affect markup. Vertical pricing theory is applied to study what kind of relationship exists between the upstream firm (manufacturer) and the downstream firm (dealership) when it comes to pricing and markups. To study what factors might have an effect on markup an ordinary least squares regression has been used. Some important conclusions can be drawn from this. Car type seems to have a significant effect on markup. The manufacturer is also a relevant factor in the size of the markup. Arbitrage opportunities are also indicated by having a smaller markup if the car is new.