Some Basic Thoughts on the Economics of the Car Impounding Industry

Most people have dealt with or will deal with the annoyance of having one’s car impounded. Not only must you track down the impound lot, lose work hours potentially, and secure a ride, but you must also pay a ridiculous price to get your car out. Where does this price come from? What is the towing and impound market anyway?

            One way of looking at the impounding market is by making the consumers the people whose cars were just towed and by making their cars the goods being sold. In this kind of market, the demand curve is defined by the consumers’ values for their cars. A price higher than a consumer’s value for his or her car will cause the person to buy a new car, use public transportation, ect. Because two firms cannot both have impounded the same car, there becomes an effective monopoly for each towing firm. In fact, each “good” is so specialized that one could even define the market as having one good for one consumer (the car and the owner of the car), assuming that the firm can only sell the car to its owner and not to anyone else (this tends to be the case for at least a few days). Now, instead of setting a general price, the monopolistic towing firm can charge each person their value for their own car minus the costs in getting to the impound lot (Unless, of course, this value minus cost is less than the firm’s marginal cost. Then there would be no sale.). In this way the firm can get as much consumer surplus out of each consumer as possible.

            The problem with this model is that towing firms tend to not price discriminate in the real world, as is implied by the model. Arbitrage would be difficult as the firm can only sell the car to the owner, making it impossible for another person to buy the car cheap and sell it to the real owner at a cheaper price. There is no identification problem as each car is so unique in the eyes of the consumer that each consumer is matched with his or her car only. In order to figure out why these firms do not price discriminate, the market must be redefined.

            By changing the products from the owners’ cars to parking spaces, we may be able to figure out why towing firms don’t price discriminate. The number of firms in the market would now be equal to the number of towing firms patrolling lots in the area as well as firms that sold each spot to a person. If a firm were to price discriminate in the same way as was shown earlier, many consumers, with somewhat decent values for their cars, would switch to another lot with a more reasonable price, even if that lot was farther from their destination.

            In this new model, we seem to find that the price would not only not be a discriminatory one, but it would also be below the monopolistic price (since there are more than one firms). Because some of our firms are not even towing firms at all but are simply land owners renting their land out to others, the price could be brought down to a point below the towing firms marginal cost. The price that the firms actually charge, though, is probably not below marginal cost. The reason for this is that towing firms count on not making much (if any) money on average days, but on certain days, where parking spaces become scarce and the demand for them is very high/ inelastic (creating monopoly power), towing firms make large “windfall” profits. The new price is now determined by the price that will both reduce losses on bad days and maximize profits on good days best.