Many automotive dealerships, such as BMW, sell low mileage late model used cars

Question

Many automotive dealerships, such as BMW, sell low mileage late model used cars (often cars that were initially leased for 1-3 years) with warranties on defects and repairs that offer more coverage for longer periods of time than the warranties on their brand new cars. Explain the rationale for this practice using the concept of asymmetric information. Include in your explanation a discussion of who benefits from these extended warranties. Is there any group of individuals or firms who are hurt?

Explanation / Answer

Now a days many automotive dealerships like BMW are focusing on selling a used cars as well as the customers are able to get good conditioned used with good dealers at very affordable prices or low prices,with lower insurance,lesser risk involved and customers are getting good services as well on buying the used car.

BMW sell low mileage late model used cars (often cars that were initially leased for 1-3 years) with warranties on defects and repairs that offer more coverage for longer periods of time than the warranties on their brand new cars as used cars depreciate faster initially in the first two years of ownership.More coverage of warranties on defects and repairs are given because the price recived on used car are more than its actual cost and to ensure the goodwill and trust on a brand these services are given for a longer time for stability and reliability as in in new car no such problems accur.

Asymmetric information is the concept under which seller has more material knowledge or information than seller.The concept of asymmetric information might apply on sales of used car because the working condition of used car ,their actual life period,the actual knowledge parts of used car,the stablity conditions all these are better knlown by seller or dealers than buyer so there is an information failure as well on the part of buyer.Dealers of new cars benefit from extended warranties but the customers benefits in case buying of used cars.

Customers are hurt with an asymmetric information as they are ignorant about the right or correct information about the used cars as they rely on dealers of a goos brand.

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