If you buy a new car for $20,000 today and then try to sell it a week later, you probably won t get more than $16,000 for it. Even if you drove it just a couple of hundred miles, cleaned it up, and returned it to the dealer with that new-car smell, the car will lose about 20 percent of its value in the first week. You won t fare any better by putting an advertisement in the newspaper or trying to sell the car on eBay. Why does the typical new car lose so much of its value in the first week?
A potential buyer of a week-old car might believe that a person who returns a car after only one week could have discovered it was a lemon and may be trying to get rid of it. Alternatively, the seller could have simply changed his or her mind about the car. The problem is that buyers don’t know why the car is being sold. As long as there is a chance the car is a lemon, they won t be willing to pay the full as-new price for it. In general, buyers are willing to pay a lot less for a week-old car, and so the owners of high-quality, week-old cars are less likely to put them on the market. This downward spiral ultimately reduces the price of week-old cars by about 20 percent