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Determinants of Used Car Demand Price: Empirical Evidence from Turkey

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The Empirical Economics Letters, 17(3): (March 2018) ISSN 1681 8997

Determinants of Used Car Demand Price: Empirical

Evidence from Turkey
Rüştü Yayar
Department of Economics, Gaziosmanpaşa University
Tokat, Turkey
Email: rustu.yayar@gop.edu.tr
Abstract: The prices of the goods with heterogeneous features are different. Each
feature of the product provides a benefit satisfying to the consumer. The consumer
values each property of the commodity that it benefits. The producers produce goods
by taking the consumers’ preferences into consideration. One of the goods with
heterogeneous features is cars. The determinants of used car demand price are
analysed in this study. The population of the research is the used car sellers in Samsun
city centre. The data are related to the 339 cars having been sold or to be sold during
the period of February – April, 2015. Semi logarithmic regression method is used.
Power steering, airbag, and rear–wheel drive variables are the most effective features
affecting the prices of used cars in a positive direction. Likewise, age (%31), drawbar
(%13) and brake assist system (%9) variables are determined as the most influential
features affecting the price of used cars in a negative direction.
Keywords: Hedonic Price, Used Car Market, Regression Analysis, Turkey
JEL Classification Number: D12, C31

1. Introduction
Transportation has doubtlessly been one of the important needs since the existence of
mankind. Mankind has always invented new instruments to save time and power. The
existence of the automotive industry is one of the greatest developments in history for
humanity. Transportation is very important for both trade and all other activities. The
automotive industry has recorded many major improvements since the first years of its
establishment, and very important vehicles getting access to every part of the world have
been manufactured. Surely, the biggest share has gone to car category, and at present, cars
with so many features like from security to interior and exterior equipment are produced
for the comfort of the people.
The first thing that individuals want to have after they get a job is an automobile. Every
person takes care to choose car according to their budget, job requirements, and
geographical location and whether they are married or single. Of course, there is a critical
mass preferring luxury cars for personal enjoyment and vanity by putting all these needs
away.
The Empirical Economics Letters, 17(3): (March 2018) 350

Used car market has been constantly improving in Turkey. In the development of the used
car market, the effects of population growth, income distribution, regional imbalances and
government policies cannot be denied. Developments in used car market make the sector
attractive.
So many retailers struggle to take place in the market so as to benefit from the excess
profit in this market. It is very important for the sellers to follow what kind of strategy in
used car market. Consumers want to pay according to various characteristics of the used
cars. It is extremely important to determine these characteristics.
This is important in terms of determining the market strategies of sellers and helping
producers to develop products according to consumer preferences. This study investigates
the behavior of buyers in used car market, which has not been sufficiently searched
experimentally in the literature up to now.
For this purpose, a regression model was estimated to determine the most effective
characteristics for used car prices. The consumer cares about informing the dealer when
buying the car. For this reason, the reliability in terms of the quality perception, price
structure, and scrap value of the car plays a fundamental role for the decision of
purchasing a car. The dependableness of car dealers is also important in used car market.
The car dealers determine the price according to the characteristics of the car (Golder et
al., 2012; Prieto et al., 2014).Adverse selection can be possible in used car market
(Akerlof, 1970). The sellers have more information related to the used car than the
purchasers in such kind of market. That the sellers have little knowledge makes the
decision making process more difficult. The aim of this study is to determine the features
affecting the used car prices. The determinants of the prices of hundreds types of cars and
that to what extent and what features affect the prices are tried to be revealed in this
research. Hedonic regression model was used to estimate the price of the used car.
Hedonic model is very successful in terms of explaining the changes in goods prices and
the factors affecting the relevant changes. The relations between the prices of the goods
and physical or geographical features are tried to be modelled through hedonic modelling.
Hedonic models are based on the regression method in analyzes (Ecer, 2013). In the
literature, hedonic price analysis seems to be applied to a wide range of goods. These are
used for car (Berry at al., 1996; Murray and Sarantis, 1999; Erdem and Sentürk, 2009;
Matas and Raymond, 2006; Sylvain, 2009; Beer, 2007), house (Wen et al., 2004; Fletcher
et al., 2004; Chen et al., 2009; Jim and Chen, 2009; Yayar and Demir, 2014; Yayar and
Karaca, 2014), and personal computer (Griliches, 1994; Pakes, 2003; Parkhomenko et al.,
2008; Goolsbee, 2001; Yayar, 2011; Chwelos et al., 2008). There is limited number of
studies related to determining the price of used cars in domestic literature.
The Empirical Economics Letters, 17(3): (March 2018) 351

This study covers the companies trading used car in Samsun city center. The reference
period for the work is February 2015-April 2015. The cars to have been sold or to be sold
are the main part of the study for the relevant period. The survey covers the city center of
Samsun, not including the counties and towns.
2. Data and Method
The data of the study were obtained face-to-face interviews with the companies included
in the study. The data were collected from used car dealer and corporate companies. The
hedonic regression model was used for the used car demand price in the study.

The hedonic price theory is seen as the sum of individual qualities or characteristics for
each good, assuming that the goods are heterogeneous. The individual qualifications of
each good are the values perceived by the consumer. They also appear to be in the utility
function of the consumer. The structure of the hedonic model is like multiple regression
model. The most used functional types in the hedonic theory are linear, logarithmic and
root transformation. The most suitable function type for this study is semi-logarithmic.
Semi-logarithmic functional form is shown as below:
𝑙𝑜𝑔 𝑃𝑖 = 𝑎0 + 𝑗 𝛽𝑗 𝑥𝑖𝑗 + 𝑢𝑖
Where 𝑃𝑖 is the price of the i product, 𝑎0 is a standard regression intercept, 𝛽𝑗 is the
regression coefficients for the 𝑗 product characteristic, 𝑥𝑖𝑗 is thejcharacteristic of the 𝑖
product, and 𝑢𝑖 is the error term (Prieto et al., 2014).

3. Results and Discussion

The regression model related to the used car demand price in Samsun city center was
estimated and analyzed. Initially, the variables thought to affect the used car price and
descriptive statistics about these variables were explained, and they were shown in Table
1. Then, the most appropriate regression model was estimated by many experiments.
While the majority of the cars in the study is Renault (%14.8), Fiat (%12.1), Ford (%10.3),
and Volkswagen (10.3) follow it. The other features of the used car in city center were
shortly summarized below:
The average age of the cars is 7.5 years old; the average price is 47,682.30 TL; %54.3 of
them is diesel; the average engine power is 100–125 HP; %14.8 of them is rear wheel
drive; %87.8 of them has airbag; %14.5 has start-stop feature, %11.8 has rear camera;
%20.1 has led lights; %25.7 has TV–Navigation system.
Even is the structure of the regression model, coefficient signs, and magnitude are suitable
and statistically significant, it cannot be said that the model is interpretable. It is necessary
to investigate the validity of the model, and if not, it should be corrected. For this reason,
 The Empirical Economics Letters, 17(3): (March 2018) 352

Table 1: Descriptive Statistics of Variables

Variables Mean Std dev. Description
Price 47682,301 47921,682 Sale price in Turkish Liras
Brand
Volkswagen 0,103 0,305 Dummy equal to1 if the car is a Volkswagen, 0 otherwise
Fiat 0,121 0,327 Dummy equal to1 if the car is a Fiat, 0 otherwise
Renault 0,148 0,355 Dummy equal to1 if the car is a Renault, 0 otherwise
Ford 0,103 0,305 Dummy equal to1 if the car is a Ford, 0 otherwise
Toyota 0,038 0,192 Dummy equal to1 if the car is a Toyota, 0 otherwise
Mercedes 0,089 0,284 Dummy equal to1 if the car is a Mercedes, 0 otherwise
Hyundai 0,062 0,241 Dummy equal to1 if the car is a Hyundai, 0 otherwise
Age 7,470 6,786 Vehicle age
Grey 0,271 0,445 Dummy equal to 1 if the car is a grey, 0 otherwise
Engine type
Diesel 0,543 0,499 Dummy equal to 1 if engine type is diesel, 0 otherwise
Gasoline 0,209 0,408 Dummy equal to 1 if engine type is gasoline, 0 otherwise
Other characteristics
Transmission type (1=manual; 2=semi-automatic;
Transmission 1,510 0,767
3=automatic)
Engine horsepower (1=50-75; 2=76-100; 3=101-125;
Engine power 2,764 1,450
4=126-150; 5=151-175; 6=176-200; 7=201- +)
Rear wheel drive 0,148 0,355 Dummy equal to 1 if rear-wheel drive, 0 otherwise
Immobilizer 0,841 0,366 Dummy equal to 1 if immobilizer, 0 otherwise
Airmatic 0,068 0,252 Dummy equal to 1 if airmatic, 0 otherwise
Electronic brake Dummy equal to 1 if electronic brake force distribution, 0
0,389 0,488
force distribution otherwise
Airbag 0,879 0,327 Dummy equal to 1 if airbag, 0 otherwise
Isofix 0,693 0,462 Dummy equal to 1 if isofix, 0 otherwise
Warning signs of Dummy equal to 1 if warning signs of tire failure, 0
0,118 0,323
tire failure otherwise
Seat cover 1,156 0,364 Seat covers (1=fabric; 2= leather)
Power steering
0,959 0,199 Dummy equal to 1 if power steering wheel, 0 otherwise
wheel
Start-stop 0,145 0,352 Dummy equal to 1 if star/stop, 0 otherwise
More than five gears 1,443 0,497 Dummy equal to 1 if more than five gears, 0 otherwise
Rear camera 0,118 0,323 Dummy equal to 1 if rear camera, 0 otherwise
Fog lamp 0,711 0,454 Dummy equal to 1 if fog lamp, 0 otherwise
Led lamp 0,201 0,401 Dummy equal to 1 if led lamp, 0 otherwise
Panoramic windscreen 0,100 0,301 Dummy equal to 1 if panoramic windscreen, 0 otherwise
Steel rim 0,805 0,397 Dummy equal to 1 if steel rim, 0 otherwise
Drawbar 0,030 0,169 Dummy equal to 1 if drawbar, 0 otherwise
USB-AUX 0,369 0,483 Dummy equal to 1 if USB/AUX, 0 otherwise
TV-Navigation 0,257 0,437 Dummy equal to 1 if TV/Navigation, 0 otherwise
Brake assist system 0,342 0,475 Dummy equal to 1 if brake assist system, 0 otherwise
Total no. of observations 339
Note: Average currency rate during the research period is: 1 USD = 2.62 TL and 1 Euro = 2.81 TL.
The Empirical Economics Letters, 17(3): (March 2018) 353

autocorrelation, heteroscedasticity and multicollinearity are investigated in the estimated

model (Tarı, 2015). The autocorrelation problem in the model for determination of the
used car prices was investigated through Breusch-Godfrey autocorrelation LM Test, and it
was concluded that there was not such a problem. The possibility of heteroscedasticity in
estimation model of this study was researched through White Test, and it was determined
that there was not such a problem.
Multicollinearity was searched in estimation model through Variance Inflation Factor
(VIF), according to the commonly-held rule, if VIF value is fewer than 10, it is accepted
that a serious multicollinearity problem is not available. On the other hand, if the VIF
values are under 5, there is not a problem, and if the VIF values are over 10, it means that
there is a serious multicollinearity problem (Greene, 2003; Asteriou, 2006). According to
table 2, it is clearly understood that since the VIF values are under 5, there is not a
multicollinearity problem in regression model. Through semi logarithmic regression,
factors increasing and decreasing the price of used car are given in table 2. According to
this, the factors that determine the price of used car and their effect ratios in the research
area are as follows:
In this regression model, R2 found as 0.936. So, 93.6% of the variability in drilling time is
explained by the least-squares regression line. F test value pointing out whether the model,
as a whole, is significant or not was found as 135.68. Among the 33 independent variables,
Renault, Toyota, and tire warning signs of the tire failure variables were not found as
statistically significant at desired significance level. Another 15 variables in the model
were found as statistically significant at %1, and another 12 were statistically significant at
%5, and the other 3 were statistically significant at %10 significance level.
Among the variables found as statistically significant, Fiat, Mercedes, Hyundai, age, gray,
electronic brake force, steel rim, drawbar, USB-AUX, and brake assist system were found
as the features decreasing the price of the used car. The other variables found as
statistically significant are revealed as the features increasing the price of the used car. The
influence rates of the regression coefficients on the price of used car were calculated, and
the results were given in Table 2.
It can be said that the automobile trademark’s Mercedes will decrease the demand price by
9.43%. It can be said that Volkswagen trademark causes a %9.97 increase in price.
Renault and Toyota variables were not found as significant at desired significance level.
Fiat and Hyundai with a relatively lower price than the other trademarks reveal the
perspectives of the consumers on these trademarks. It is not an expected result that
Mercedes trademark causes a decline in price. However, since the cars with this trademark
in the research area are old, it is thought that this situation can be the reason of this result.
The Empirical Economics Letters, 17(3): (March 2018) 354

Table 2: Percentage Effects of Regression Equation and Coefficients

Variables Coefficients VIF Relative effects of coeff (%)1
Constant 9,457*** - -
Volkswagen 0,095** 1,524 9,966
Fiat -0,099** 1,747 -9,426
Renault -0,053 1,520 -
Ford 0,084** 1,532 8,763
Toyota 0,075 1,238 -
Mercedes -0,077* 1,675 -7,411
Hyundai -0,185*** 1,388 -16,890
Age -0,310*** 4,063 -31,000
Grey -0,055** 1,139 -5,50
Diesel 0,189*** 3,282 20,804
Gasoline 0,063* 2,185 6,503
Transmission 0,047*** 1,521 4,700
Engine power 0,137*** 3,002 13,700
Rear wheel drive 0,200*** 2,251 22,140
Immobilizer 0,112** 3,658 11,851
Airmatic 0,094** 1,405 9,856
Electronic brake force distribution -0,093*** 1,752 -8,881
Airbag 0,220*** 3,714 24,608
Isofix 0,087** 2,581 9,090
Warning signs of tire failure 0,069 1,869 -
Seat cover 0,183*** 1,879 18,300
Power steering wheel 0,269*** 1,483 30,866
Start-stop 0,089** 1,635 9,308
More than five gears 0,094*** 1,947 9,856
Rear camera 0,174*** 2,434 19,006
Fog lamp 0,072** 1,666 7,466
Led lamp 0,138*** 1,925 14,798
Panoramic windscreen 0,133*** 1,472 14,225
Steel rim -0,056* 1,545 -5,446
Drawbar -0,139** 1,323 -12,977
USB-AUX -0,051** 1,545 -4,972
TV-Navigation 0,089** 1,639 9,308
Brake assist system -0,098*** 1,475 -9,335
R2 /Adjusted R2 0,936/0,929
F (calculated/probability) 135,678 (0,000)
Durbin-Watson test 1,984
Kolmogorov-Smirnov(calculated/probability) 0,035 (0,200)
White test (calculated/probability) 42,797 0,1713)
Note: N = 339. *, **and *** indicate statistical significance at the %10, %5, and %1 levels,
respectively. 1’ as the model was semi logarithmic, the relative influence of dummy variable on
dependent variable was calculated through Halvorsen and Palmquist approach [100(e β-1)]. There
was not a calculation for the insignificant coefficients at %10 importance level.
The Empirical Economics Letters, 17(3): (March 2018) 355

The older a car is, the lower the price will be. Older cars have fewer features, more
mileage and worn out than new cars. According to the findings in this study, a one-year-
aging of the car causes the price to decrease at %31 rate. In the study of Ecer (2013), the
most effecting factors on the car price were determined as the trademark, model, engine
power, kilometer, age, fuel type, and transmission of the car. The first four features
increasing the price of the used cars were respectively power steering wheel (%30.87), air
bag (%26.61), rear wheel drive (%22.14), and diesel fuel (%20.80). Likewise, the first
four features decreasing the price of the used cars were respectively age (%31), Hyundai
(%16.89), drawbar (%12.98), and Fiat (%20.80).
4. Conclusions
The automotive industry has made progress for nearly 150 years in the world and for 50
years in Turkey. Campaigns for the sale of new vehicles increase vehicle sales and thus
contribute to the growth of the used car market. As the income level rises, the preferences
of the consumer alter. The new equipment and features added to the cars in accordance
with the consumer preferences encourage the people to renew the car in a shorter time. In
this study, the features determining the price in used car market are revealed.
It was concluded that the cars to have been sold or to be sold in Samsun city center during
the research period were new, and they could be sold with average 48 thousand TL. The
most preferred trademark in the area is Renault (%15), and Ford and Volkswagen follow
it. It can be stated that the high average price level is due to the diesel cars (%54). The
used cars’ not being so old and including much equipment was revealed as the features
increasing the price.
The most suitable functional model is determined as semi logarithmic in order to
determine the factors affecting the price of the used cars in Samsun city center. Among 33
independent variables in semi logarithmic regression model, Fiat, Mercedes, Hyundai, age,
gray, electronic brake force, steel rim, drawbar, USB-AUX, and brake assist system
variables are the features decreasing the price. The other significant variables out of the
ones stated above are found as the features increasing the price. The first four features
increasing the price of used car are respectively power steering wheel (%30.87), air bag
(%24.61), rear wheel drive (%22.14), and diesel fuel (%20.80).

Such security features as ASR, ABS, and ESP unknown to the most of the drivers are not
effective in price determination; therefore, they are not added into the model. Hence,
through the meetings to the sellers, it is understood that the consumers did not care about
these features, and most of them did not ask anything about these security features. Once
more, from these meetings, it can be concluded that the consumers did not value such
security features as ABS, ASR, and ESP. Instead of this, they evaluated the security of the
The Empirical Economics Letters, 17(3): (March 2018) 356

car in terms of the trademark. In selling or buying the cars, the user defines that if the car
is Volkswagen, it is secure, or if it is Hyundai, it is not secure. Therefore, it is
comprehended that the consumers perceive the trademark in this way. It is expected that
the findings remain beneficial to the sellers to determine a price for used car, and the car
producer and distributors.

Acknowledgement
This study was presented in the form of a summary paper at the 1st International Congress
of Economy Management and Market Research in İstanbul on 4-5 December 2015.

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