Why was the manufacturer losing money on this program

08Feb 2022 by

Can, and how does, the entrant succeed? Is the incumbent ever in control of this game?

You may wish to review the old game known as Duopoly, as well as Antoine-Augustin Cournot, to help inform your post.

In the late 1990s, car leasing was very popular in the United States. A customer would lease a car from the manufacturer for a set term, usually two years, and then have the option of keeping the car. If the customer decided to keep the car, the customer would pay a price to the manufacturer, the “residual value,” computed as 60% of the new car price. The manufacturer would then sell the returned cars at auction. In 1999, the manufacturer lost an average of $480 on each returned car (the auction price was, on average, $480 less than the residual value).
Assignment

Why was the manufacturer losing money on this program? Was this a problem of adverse selection or moral hazard? What should the manufacturer do to stop losing money?  Will rational actors use rules of thumb?

 
Speculate on why corporations do not lower their explicit payroll cost by hiring accountants without a CPA. Consider how asymmetric information, moral hazard, and adverse selection may the perception of risk?
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