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Abstract:
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Automotive manufacturers offer their dealership network a wide variety of financial packages during different time periods. In any time period, all dealerships receive the same offers. These packages include combinations of cash rebates and interest rates that are sometimes offered directly to the customer and sometimes to the dealership, who can choose the amount to pass on to customers. Dealerships systematically vary in their preferences for financial packages, and this variation is greater than expected from purely economic considerations. The manufacturer's profits depend on the interaction between the preference of customers and dealers. We propose a structural, hierarchical Bayesian model for customers' and dealers' preferences in a structural model. The model is calibrated to data from a manufacturer, and the estimates are used in a simulation model to design optimally financial incentive offers.
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