New Cars with Discount over Internet

I read that selling cars is referred as “a sucker’s market”, because car dealers wait for a “sucker”, on whom they can score. Away from urban tales, George A. Akerlof received a Nobel Prize in Economics for studying the market for lemons, where he referred to used cars market as an typical example of trading lemons. The theory in a nutshell says that owners of good cars keep them and owner of lemons place them at the market. As customers cannot distinguish between good cars and lemons, they are not willing to pay the fair price for a good car, hence pricing all cars as average at the market. As a result, owner of good cars do not sell their cars at the market, where only over priced lemons remain.

That is probably one of the reasons, Iñaki Arrola, founder of autodescuento.com and coches.com started its website with new cars only. The business model is following:

1. Contracted car dealers enter their stock cars to the web page

2. Customer searches for a new car based on her criteria

3. Customer sees only models and prices without disclosing the dealer’s identity

4. After filling out the request form, customer gets into contact with dealer

5. Coches.com receives commission from sales. Additionally, coches.com can contract insurance or financing for the car with commission as well.

The process is very easy for both dealers and customers. Dealers just select car model and set desired discount from the official list price. Customers enjoy very intuitive interface with option to specify car they want based on “human” terms like “small” or “big” etc. All the photos and car presentation is very professional, informative, but not overwhelming. Iñaki claims inspiration with Apple design philosophy of simplicity and usability.

The advantage of new cars over the used one is absence of the lemon issue mentioned in the beginning. Moreover, new car itself of the same model is de facto a commodity without a difference for customer from whom she buys. Therefore at coches.com, dealers compete with each other only on price without possibilities for differentiation with services etc. Unlike at German competing site mobile.de, dealers cannot put their address or contact number to the site so that they are fully “enveloped” in the platform. What about car manufacturers, do they like these two sided platforms between customers and car dealers. Not at all. As, Iñaki mentioned during the presentation, car manufacturers pretend they do not know as such platforms destroy their regional distribution model. At coches.com any dealer from any part of Spain can sell to customers anywhere, which substantially increases competition and eventually will push down prices for new cars.