Trading on Up: An Examination of Factors Influencing the Degree of Upgrade: Evidence from Cash for Clunkers

Abstract

Durable goods firms often create product lineups to provide a clear upgrading path as consumers make replacement decisions. Consumers can upgrade a little (i.e., spend a bit more than last time) or a lot (i.e., spend substantially more). However, the factors affecting the degree of such vertical “moving up” have received limited scholarly attention. In particular, little is known about how trade-in characteristics and the marginal costs–benefits of the new purchase influence the degree of upgrade. The authors use 320,000 Cash for Clunkers automobile transactions to provide the first examination of how mental accounting surpluses from trade-in ownership time and trade-in windfall, in addition to brand loyalty, affect the degree of upgrade. The authors find that trade-in ownership time and brand loyalty enhance the replacement’s degree of upgrade. However, trade-in windfall size has a negative effect, revealing the downside of this common promotional practice. Two experiments and additional dealer data indicate that this finding is robust to different economic conditions. Thus, these findings provide valuable new guidance for durable goods firms to facilitate the degree to which consumers upgrade.