Playing the role of buyer and seller: The mental accounting of trade-ins

This paper examines the role of trade-ins in consumers' purchases of new durable goods. We argue that even if the net price paid by consumers who trade in an old product remains the same, varying the offer on the trade-in substantially affects consumers' satisfaction with the transaction. In particular, because the product is a part of their endowment, consumers' valuation of their used product can be more than the market's valuation. While the endowment effect is a well-documented phenomenon, its implications for trade-ins have yet to be studied. We use the notion of mental accounting and endowment effects to develop a model of trade-ins. We show that even if two deals are financially equivalent, the preferred option for consumers is often the one in which the consumer is overpaid on the trade-in. In addition, we find that consumers who are overpaid (relative to a market price) on their trade-in are willing to pay a higher net price than are consumers who are underpaid on their trade-in.