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Extended Warranty Prices as a Market Measure of Quality

Summary:
Yesterday, as I was writing my latest piece for the Hoover Institution’s on-line publication Defining Ideas, I was telling a friend that when my wife and I shop for cars, we pretty much shop for only cars made by Japanese companies. In our experience, and in the data we’ve looked at over the years in Consumer Reports and elsewhere, cars made by Japanese companies* are much more reliable than those made by U.S. companies. One set of data I’ve looked at that confirms that is on resale prices. Japanese cars tend to maintain their value much better than American cars. He told me some other data that also confirm this. Last year he shopped for a used car and wanted a reliable 2012 model. Because he wanted it to be reliable, he priced an extended warranty. For U.S.

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Extended Warranty Prices as a Market Measure of Quality

Yesterday, as I was writing my latest piece for the Hoover Institution’s on-line publication Defining Ideas, I was telling a friend that when my wife and I shop for cars, we pretty much shop for only cars made by Japanese companies. In our experience, and in the data we’ve looked at over the years in Consumer Reports and elsewhere, cars made by Japanese companies* are much more reliable than those made by U.S. companies.

One set of data I’ve looked at that confirms that is on resale prices. Japanese cars tend to maintain their value much better than American cars.

He told me some other data that also confirm this. Last year he shopped for a used car and wanted a reliable 2012 model. Because he wanted it to be reliable, he priced an extended warranty. For U.S. cars, he didn’t find the kind of warranty he wanted for under $5,000. For the car he ended up buying, a 2012 Nissan Versa with 34,000 miles on it, he was able to get a 5-year, 100,000-mile bumper-to-bumper warranty with a $50 deductible for only $1,400. And if he took it for repairs to CarMax, the seller, the deductible would be zero.

Nice market evidence.

*”Cars made by Japanese companies” and “cars made by U.S. companies” are wordy terms, so henceforth I’ll use the term “Japanese cars” and “American cars” even though I’m aware that many Japanese cars are made in the United States. Indeed, there really is no such thing as an American or Japanese car that is mass-produced; they’re really world cars.

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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