It’s been a few weeks since Harley-Davidson announced the immediate closure of its subsidiary Buell, where dealers began slashing prices both to liquidate stock and to cash-in on Harley’s $5,000 sale incentive. Basic economics dictates that any time a price is raised or lowered it has repercussions to the product’s resale value, and in the case of Buell’s sudden price drop and dumping of basically new bikes into the market, the consequences for current Buell owners seem dreary. Or are they?
In order to find an answer to that question, we asked Joshua Minix, former government think-tank Economist, and current John M. Olin Fellow in Law and Economics at Harvard Law School, to wade through the implications of Buell’s closure, and how it affects the used Buell motorcycle market. Click past the jump for his analysis.
Buellnomics 101: Supply & Demand
Before we jump into an analysis, we should first cover the economic basics that surround the used market for Buell motorcycles. The most elementary determinants of pricing are supply and demand. All else equal, increased supply or reduced demand will cause a fall in price and vise versa. Harley-Davidson’s announced closure of Buell Motorcycles has altered this economic balance beyond the fluctuation you would typically see in the used market for motorcycles. Here we discuss four significant ways in which this announcment could affect the supply and demand of Buell motorcycles.
First, the deep price cuts on new existing inventory is best understood as a short-term surge in supply because more units are available at a given price.
Second, many people may now be less interested in buying a Buell at a given price due to reduced advertising, concerns over parts, support and such (reduction in demand).
Third, some people may be more interested in buying a Buell if they already wanted one and now are rushing out to get a new one before they are all gone (increase in demand).
Finally, with production shutdown, the total quantity of new Buells available is decreasing with every unit sold (long-term reduction in supply).
By weighing the relative magnitude of these influences, we can begin to predict how the market will affect different purchasers of Buell motorcycles, in relation to when they bought their bike to Buell’s announced closure. Since the implications will be different for each group, we’ll take them in turn:
Buyers Who Bought After Buell’s Announcement (The Good)
These buyers are in great shape for two reasons. First, the prices were likely well below market value – evidenced by the fact that Buells were more or less selling for nearly double the fire-sale prices just days earlier and by the speed at which the fire-sale Buells were purchased. It is hard to imagine a better deal on a new motorcycle in terms of the physical product that was available for the price.
Second, these Buell owners are also likely not to experience drastic depreciation because once the supply of new, sale-priced Buells dries up, everyone wanting a Buell will have to shop the used market. Provided that demand does not drop off too drastically, long-term used prices of Buells should remain quite good relative to the fire-sale prices.
Buyers of New/Used 2008 Model Year Buells or Later (The Bad)
Riders who have owned their Buells for a year or more may be in a worse financial situation than the fire-sale buyers. The Buell fire-sale will decrease the market value of used Buells, but as this supply is quite limited, the effect will probably not be long-lasting.
Buells over a year old have already suffered the worst of their depreciation before the announcing of Buell’s closure. This may represent a bit of a financial hit for the more recent buyers in this category who must sell now, but overall this group will suffer a relatively moderate decrease in bike value for the near-term.
The longer-term implications depend on the trade-off between the relative magnitudes of the decrease in supply due to stopped production, and the decrease in demand due to anticipated lack of factory support, advertising etc. All of these changes in value are damped by the fact that these buyers have been out riding and enjoying their bikes.
Buyers of 2009 Model Year Buells (The Ugly)
These buyers will be the most financially impacted Buell owners. At an extreme, a rider who purchased an 1125 on the 15th could have seen the value of the new acquisition drop by half overnight. We expect bikes to loose value when we ride them off the lot – but not anywhere near this extreme.
This is particularly bad for owners that are forced to sell quickly as losses will be significant. Owners who will be able to keep and enjoy their bikes are the best off in this group.
If the bike was worth full price to a rider before the closure, the intrinsic value to that rider needn’t have changed significantly after the closure – only concerns about parts and servicing really affect how much one would expect to enjoy a new bike and Harley-Davidson’s promise to provide servicing for 7 years should allay these fears to a great degree. Once the short-term effects of the Buell fire-sale are over used prices could rebound provided that demand isn’t overly squelched by concerns about support, etc.
Most in this group will be best off by not selling their recently purchased Buells. These buyers valued their Buells highly at the time of purchase, and the demise of Buell is not likely going to harm their ability to enjoy the bikes as much as the bikes have depreciated in recent weeks. Also, as noted, depending on how demand is affected, used prices are likely to hold reasonably steady or possibly even increase over time.
In closing, enjoy the bike, have fun and try not to worry too much about market value. If you must sell your recently purchased Buell remember that the purchase price is a sunk cost and move forward.