Competition and Anomalies Redux: Evidence from U.S. Auto Dealers

2026-06-30

AI Summary

This study investigates why U.S. auto dealers frequently deviate from profit-maximizing choices when selecting incentive contracts and how market competition influences such behavioral biases. Leveraging real-world contract selection data from dealers of a major automaker, the authors employ a fixed-effects model that exploits both cross-sectional and dealer-level panel variation to identify the causal relationship between competitive intensity and decision errors. The findings reveal that approximately 20% of contract choices are suboptimal, resulting in an average annual loss of $18,453 per dealership. While heightened market competition significantly reduces the incidence of these errors, this effect operates primarily through changes in the behavior of incumbent dealers rather than through firm entry or exit. Notably, substantial decision mistakes persist even under intense competitive pressure.

Abstract

We examine a choice between bonus contracts offered to dealers of a U.S. auto manufacturer. In our data, dealers select the non-profit-maximizing option in 20 percent of observations, costing the mistaken dealers $18,453 per year on average. We examine how the propensity to make this mistake varies with competition, identified both cross-sectionally and within dealers over time. Both analyses show that greater competition substantially lowers the rate of mistakes. However, even in the most competitive markets, consequential mistakes persist. Our results suggest that competition disciplines mainly through within-dealer changes in behavior rather than entry and exit.

Problem

• competition
• contract choice
• behavioral anomalies
• dealer decision-making
• market discipline

Innovation

• competition
• behavioral anomalies
• bonus contracts
• dealer decision-making
• market discipline