Saturday, May 23, 2009

Demise of Chrysler's dealers and a modeling problem

An interesting thought experiment.

Chrysler is closing many of its dealers over the next 3 weeks as part of its planned bankruptcy. If you are a dealer who is facing the axe, how might you go about liquidating your inventory at the best possible return? Or more realistically, the least loss.

One idea might be to have an auction for individuals. Define a strike price (don't disclose, of course!), promise at least as good a price as what other dealers for comparable cars are willing to offer. And let the bidding begin. There might be some marketing spend to print out a few hundred mailers and send it out to the neighborhood.

Another parallel strategy can be to have a reverse-auction for other dealers which can then be volume driven. Assuming that Chrysler demand does not plummet to zero when its factories are shut and it is going through its bankruptcy, there will be a few months-long phase when Chrysler dealers will not have enough inventory to meet their demand. At least some of them. The reverse action you set up can promise to drive down the average price of the vehicle if the purchasing dealer is willing to pick up volume. So internally, have a strike price of (say) $20K / vehicle if you buy one Jeep, but the price drops to $18.5K if you buy 2, $17.75K if you are willing to buy 3 and so on.

But any other ideas on how to model this? What might a good algorithm be? Does one use game theory to solve the problem?

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