Do Dealers Profit from Fluctuations in the COE System?
Do Dealers Profit from Fluctuations in
the COE System? — An analysis of the
relationship between car prices, dealer’s
profits and COE costs
LOW Joo Hui & LIM Yong Long1
Abstract
Anyone who wishes to register a new vehicle in Singapore must first obtain a Certificate
of Entitlement (COE) in the appropriate vehicle category. A COE represents a right to
vehicle ownership and use of the limited road space for 10 years.
Car dealers, through the bidding for COEs or the structuring of their car packages, play
an integral role in the COE and car market. This paper seeks to determine if car dealers
profit from the COE system through the manipulation of car package prices when COE
premiums fluctuate. Analysis is carried out on car package pricing strategies to understand
the influence that dealers have on the vehicle market.
A study was conducted by tracking the car package prices of the top 20 car models sold
from 2011 to 2012. The car package price fluctuations were measured against changes in
COE premiums, volatility in the COE prices and the Open Market Value (OMV) of the car.
Our findings indicate that dealers, through their car package deals, mitigate the shocks
from fluctuations in COE. Dealers change car package prices to incorporate only 85% of
the current COE premium. Therefore, the study concludes that dealers act as a buffer to
the volatility in the COE premiums, absorbing both cost-saving and cost-increases from
their customers.
Background: Vehicular controls in
Singapore
As of 2013, roads take up 12 percent of
Road congestion is a common problem in cities.
percent for housing. The trade-off between
Singapore, as an island city-state of 710km ,
using land space for roads versus other purposes
with a growing population and economy, is
will become more acute in the coming years
particularly vulnerable to road congestion arising
and hence increases the importance of vehicle
from increased vehicle ownership and usage.
ownership and usage management.
2
Singapore’s total land area, compared to 14
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37
Do Dealers Profit from Fluctuations in the COE System?
Figure 1: Traffic waiting at a pedestrian crossing in
Singapore
Bidders submit their bids by entering the
maximum price that they are willing to pay
(Reserve Price) into the bidding system. The
number of successful bidders is limited by the
COEs available for each category.
The bidder stays in the auction as long as his/
her Reserve Price is equal to or higher than the
Current COE Price (CCP), which is the Reserve
Price of the current highest unsuccessful bidder
Understanding that we cannot build our way
out of congestion, Singapore has progressively
implemented a variety of vehicle ownership
and usage restraint measures since the 1970s2.
plus S$1. If the CCP rises above the bidder’s
Reserve Price, the bidder is then out of the
running for a COE unless he/she revises his/her
Reserve Price upwards. The real-time CCP is
shown during the entire auction period. At the
The Certificate of Entitlement (COE) system,
close of the exercise, bidders whose Reserve
introduced in 19903, requires motorists to bid
Price is equal to or higher than the CCP will
and pay for COEs before registering vehicles for
secure a COE.
road use in Singapore. The number of vehicles
on the road is regulated through a limited
number of COEs, determined largely by the
allowable annual vehicle growth rate as well
as the number of quotas released by
deregistered vehicles.
Background:
system
The
COE
bidding
The final CCP is the Quota Premium for the
bidding exercise for the COE category. All
successful bidders in the vehicle category will
pay the same Quota Premium for that category.
Background: Role of dealers in the
bidding system
Today, car buyers are often offered package
To distribute the COEs, the Government uses
deals by the dealers at a fixed price inclusive
an auction system because it is believed to be
of the COE premium and other services such
the fairest and most efficient way to allocate a
as insurance. The package generally costs less
scarce, non-basic resource; the COEs will go to
than if the buyer were to obtain their own COE.
the people who value them most and who are
willing to pay.
A dealer typically agrees with the customer
to bid for a COE up to four to six times over
Since 2000, COEs are allocated via an open
the next two to three months. Dealers can
bidding system conducted twice a month.
only bid for Category A and B COEs under
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Do Dealers Profit from Fluctuations in the COE System?
their customers’ name and the COEs are not
transferable. The Open Category (Cat E) can
Figure 2: Newly opened Marina Coastal Expressway
(MCE)
be used to register any vehicle and can be
transferred once within 3 months.
Dealers/individuals will have to obtain a COE
before registering their cars. In some cases,
dealers will already have the car in their
inventory before obtaining a COE. Thus dealers
will aim to obtain a COE in order to complete
concentration and the dealers’ implicit mark-
the registration and finalise the sale of the
up on their package deals. He calculated the
car. The majority of the bids are submitted by
effective mark-up, across 20 brands, to be around
dealers today, with a handful of individuals
129%-134% in 2002. The results were congruent
bidding for their own COEs.
with the 124% mark-up in 1995 calculated by
Toh and Phang (1997), which showed an increase
Motivation for study
from the 80% mark-up previously reported by
Since 2009, there has been a rapid increase in
Phang (1992).
COE prices due to the fall in the number of COEs
from 2007 to 2012. Beyond the fall in supply,
there was also growing concern over other
Koh’s (2003) study also found that the car
distributorship
market
has
become
more
potential causes of the escalating COE premiums.
concentrated over the years. The collective market
Over the years, members of the public have
new car registrations, compared to 63% in 1995.
been voicing their feedback on various aspects
of the COE system; from the determination of
COE growth rate to its allocation. A substantial
number claim that dealers are profiteering from
the COE fluctuations (through COE bidding
and pricing in COE in their car package prices)
and hence dealers should be removed from the
COE market and banned from incorporating
the cost of COEs into their car package prices.
A few academics have done extensive research
on the area of car package pricing with
respect to COE premiums. Koh (2003) studied
the impact of the COE System on market
share of the top 5 brands4 in 2002 was 95% of the
Therefore, there is a growing interest to study if
this increase in market concentration might have
led to more profiteering by the dealerships.
This study seeks to address the claim that dealers
are profiteering from COE fluctuations and to
evaluate the role that dealers play in the COE and
car market.
This study seeks to address the
claim that dealers are profiteering
from COE fluctuations and to
evaluate the role that dealers
play in the COE and car market.
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Do Dealers Profit from Fluctuations in the COE System?
Hypotheses
The magnitude of SDCOE will be smaller in times
Our first hypothesis is that dealers can benefit
of stability and larger when there is significant
from increases in COE premiums. If dealers
volatility in COE prices.
are profiteering, they would increase their car
package prices by proportionately more than COE
Methodology
price increases, hence increasing their profits. E.g.
To test our hypotheses, we collected the car
if COE prices increase by $1,000, dealers might
package price and car cost data of the 20
take this opportunity to increase car prices by
most popular cars (see Annex A), based on the
$1,500 and cream off an additional profit margin
numbers sold in 2011-2012.5 The 686 data points
of $500.
were obtained from www.onemotoring.com.sg
and www.sgcarmart.com for total car basic cost
Our second hypothesis is that volatility in COE
and listed car prices respectively. The car package
prices may allow dealers to demand a higher
prices were taken right after the announcement
price because buyers might not be able to
of COE prices after each bidding exercise.
predict COE prices as accurately as dealers,
hence are unable to determine a “fair” package
The fixed effect regression model6 was
price. Therefore, this potentially allows dealers
conducted on the determinants of car package
to extract more profits from their customers
prices with the following specification:
by charging a higher than “fair” price in times
of high COE price volatility. We would thus expect
periods of high volatility to result in higher prices.
Therefore, we posit that the objective of the cardealer is to maximise their Expected Profits by
changing their prices given the Expected COE price.
Car Package Priceit =
α i + β 1 CO E i ,t + β 2 CO E i ,t-1 + β 3 BCC i ,t + β 4 BCC i ,t-1
+β5SDCOEi,t+β 6SDCOEi,t-1+εi,t
where i and t represents the individual and time
dimension respectively.
Basic Car Cost (BCC) includes the Open Market
We posit that car package prices are set as
Value (OMV) of the car and all the statutory costs
a percentage of total car costs in order to
(such as Additional Registration Fee and Goods &
get a fixed profit margin. Hence we would
Services Tax) of purchasing a car, whereas Profits
expect changes in profits to be correlated to
includes the dealer’s manpower cost, overheads
fluctuations in basic car costs.
as well as any supernormal profits accrued.
As dealers sell car packages prior to bidding
“Maximise” E(Profits) =
for COE, and subsequently bid for it in the next
Car package price - Basic Car Cost - E(COE price)
few bidding exercises, we assume that dealers
use the current COE premium as a proxy for
As a measure of variance and volatility, we use the
the final COE price payable and hence set their
Standard Deviation of the current and previous
prices on that basis.
COE prices, SDCOE, on their quarterly average.
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Do Dealers Profit from Fluctuations in the COE System?
Results of the model
The results table is shown in Annex B.
The model shows that car prices today are highly
correlated with COE prices today and COE prices
in the previous bidding period. The coefficients
on COE premium and its lag, β1 and β2, imply
that dealers change their prices by about 85%
of the current COE premium and around 18%
of the COE premium in the previous bidding
Contrary to our hypothesis, car
prices are not influenced by the
basic car costs (OMV and statutory
costs) as the coefficients are
jointly statistically insignificant.
The model results also show that
car prices are not related to COE
volatility. The coefficients on
our COE volatility variable were
statistically insignificant.
exercise, suggesting that dealers smooth out
volatility in COE premiums.
We ran several variations to the model to test
Contrary to our hypothesis, car prices are not
influenced by the basic car costs (OMV and
statutory costs) as the coefficients are jointly
statistically insignificant. The data show that
OMV fluctuates much less than COE and hence
the model is unlikely to pick up a relationship
between OMV and car price. Another reason
could be that dealers are slower in reacting to
changes in basic car costs and only internalise
the change when it becomes significant, which
potentially incorporates the changes to COE
prices as well.
The model results also show that car prices are
not related to COE volatility. The coefficients
on our COE volatility variable were statistically
insignificant. This suggests that dealers do not
or are not able to charge a higher price in times
of higher COE volatility.
for robustness. One hypothesis is that prices are
sticky downwards: Dealers are unlikely to lower
their car package prices when COE prices fall,
but are more than willing to increase car prices
when COE prices increase. However, the model
found no statistical evidence that price changes
are one-sided, hence suggesting that dealers
do actively lower their prices when the cost
of COE falls7. This may be due to competition
across various dealerships which forces dealers
to lower their prices to match their competitors’
or risk losing potential business transactions.
However, the results suggest that when COE
prices are on the downtrend, whilst dealers
actively lower their prices, they do not pass on
the full reduction in price to their customers. This
may have led to the perceived “profiteering”
by dealers as they absorb some of the cost
savings from lower COE premiums. It is to be
noted that the inverse happens when COE
prices are on the uptrend: dealers help to
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41
Do Dealers Profit from Fluctuations in the COE System?
absorb some of the increase in cost when COE
With the latitude that dealers have through
premiums increase. Therefore, the results
the bidding of COEs and packaging it into car
suggest that dealers act as a buffer to the volatility
prices, some buyers may suspect that dealers are
in the COE premiums, absorbing both cost-saving
profiteering from the fluctuations in COE prices.
and cost-increases from their customers.
However, car buyers fundamentally choose to
obtain their COEs through their dealers for several
Conclusion & Potential for Future
Research
reasons. Having dealers bid for the COEs relieves
This study seeks to address that concern by
and figuring out the appropriate price to bid.
analysing the changes in car package prices vis-
Most dealers also provide financing packages for
à-vis fluctuations in COE premiums alongside
their cars. Obtaining the COE through the dealers
cost variations. The results of the study are
allows buyers to secure financing for the COE cost
indicative that dealers, through their car package
under the same financing package with ease.
them of the hassle of bidding for it themselves
deals, act as a buffer to the volatility in the COE
premiums, absorbing both cost-saving and cost-
There is potential scope to conduct further
increases from their customers. The study shows
research into the topic. For example, this
that dealers change their prices by about 85%
preliminary study only tracked the 20 most
of the current COE premium and around 18%
popular cars in 2012. For a more complete
of the COE premium in the previous bidding
follow-up study, it would be more robust if the
exercise. Hence, this pricing behaviour potentially
exhaustive set of car makes and models were
suggests that dealers contribute to stabilising the
tracked over time.
car market.
Furthermore,
The results of the study are
indicative that dealers, through
their car package deals, act as
a buffer to the volatility in the
COE premiums, absorbing both
cost-saving and cost-increases
from their customers. The study
shows that dealers change
their prices by about 85% of
the current COE premium and
around 18% of the COE premium
in the previous bidding exercise.
Hence, this pricing behaviour
potentially suggests that dealers
contribute to stabilising the
car market.
42
there
were
some
limitations
to the data used in this study. The car
package prices, which were extracted from
www.sgcarmart.com, were declared by the car
dealers; hence it did not necessarily capture the
actual or final price paid by the consumer since
discounts could have been negotiated. A followup study which manages to incorporate the actual
car package prices would allow the researcher to
eradicate some of the noise in the current dataset.
Therefore, this preliminary study on dealers’
pricing behaviour hopes serve as a starting point,
to encourage more interest in developing new
research ideas related to this topic.
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Do Dealers Profit from Fluctuations in the COE System?
Annex A
MAKE AND MODEL OF CARS USED IN THE REGRESSION
MAKE
MODEL
AUDI
A4 1.8 TFSI MU (NAVIGATION & XENON)
B.M.W
320I AT D/AB 4DR ABS HID
CITROEN
C4 1.6I EHDI EGS
FORD
FOCUS 1.6 TITANIUM 4-DR C346
HONDA
CIVIC 1.6L VTIS AT
HYUNDAI
ELANTRA 1.6 AT ABS D/AB 2WD 4DR
KIA
CERATO FORTE 1.6A (6 SPEED)
MERCEDES BENZ
C 180
MERCEDES BENZ
E200 A
MINI
COOPER S COUPE AT ABD D/AB GAS/D TC
MITSUBISHI
LANCER EX 1.6 A/T
NISSAN
SYLPHY 1.6 CVT ABS D/AIRBAG 2WD 4DR
OPEL
ASTRA J 1.4AT5DR TURBO
PEUGEOT
3008 1.6 E-HDI ACTIVE SUV
TOYOTA
VIOS 1.5 E AUTO
TOYOYA
WISH CVT
TOYOTA
COROLLA ALTIS 1.6 A
VOLKSWAGEN
JETTA 1.4 TSI AT 1623Q5
VOLKSWAGEN
TOURAN 1.4 TSI AT 1T33B4
VOLVO
S60T4
Annex B
FIXED-EFFECTS REGRESION (DEPENDENT VARIABLE: CAR PACKAGE PRICE)
Independent Variables
Equation (a): Main Regression
Equation (b): Positive Dummy
Coefficient
Std. Err
Coefficient
Std. Err.
COE_(i,t)
0.086
0.067***
0.830
0.096***
COE_(i,t-1)
0.185
0.057***
0.223
0.088***
BCC_(i,t)
0.231
0.148
0.234
0.146
BCC_(i,t-1)
0.210
0.095**
0.243
0.097**
SDCOE_(i,t)
-0.115
0.115
-0.133
0.111
SDCOE_(i,t-1)
0.033
0.087
0.042
0.074
PositiveCOE_(i,t)
0.001
0.010
PositiveCOE_(i,t-1)
-0.010
0.006
Constant
Numbers of Obs
540079.25
14297.63***
51303.88
14337.55***
641
632
R-squared
0.5835
0.6109
Prob > F
0.000
0.000
Notes: ***indicates significance at the 1% level; ** indicates significance at the 5% level,
*indicates significance at the 10% level
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Do Dealers Profit from Fluctuations in the COE System?
Annex C
Chronology of Changes to the Certificate of Entitlement System
Year
1990
Changes to the system
• The Vehicle Quota system was introduced.
• Initial annual allowable vehicle growth rate was set at 3 per cent.
• The proportion of recycled COEs contributed to the Open Category, from all other categories,
was set at 20 per cent.
• There were 7 COE categories:
Category 1: Small Cars – Cars with engine capacity below 1,000cc
Category 2: Medium Cars – Cars with engine capacity between 1,001cc and 1,600cc
Category 3: Big Cars – Cars with engine capacity between 1,601cc and 2,000cc
Category 4: Luxury Cars – Cars with engine capacity above 2,001cc
Category 5: Commercial – Goods vehicles and buses
Category 6: Motorcycles
Category 7: Open Category
1992
• Introduction of 5-year COE re-validation to allow greater flexibility in the renewal of COEs.
• Switching to Electronic Tender System for COE bidding.
• The contribution rate to the Open Category was increased to 25 per cent.
1995
• Double transfers of COEs were banned to avoid speculation.
1998
• Change in calculation of Prevailing Quota Premium (PQP) to the moving average of QPs
in previous three months, instead of the previous 12 months. This was to increase the
responsiveness of the PQP.
1999
• Change in the Quota Formula. The formula was changed to take into account projected
deregistrations rather than actual deregistrations of the previous year in deciding the vehicle
quota for the year. This was to make the annual quota more responsive to demand.
• The Car COE Categories were merged, resulting in 5 categories in total:
Category A: Cars with engine capacity below 1,600cc
Category B: Cars with engine capacity above 1,600cc
Category C: Commercial – Goods vehicles and buses
Category D: Motorcycles
Category E: Open Category
2001
• Online ‘open’ bidding was implemented for the COEs.
2009
• Annual allowable vehicle growth rate reduced to 1.5 per cent.
2010
• Change in the Quota Formula. Instead of releasing replacement COEs based on annual
projected deregistrations, the quota would be determined bi-annually, based on actual
deregistrations in the previous 6 months.
2012
• COEs used for taxi fleet expansion would be extracted from the Open Category instead of Cat
A. As such, the Open Category would have a small growth component of 0.5 per cent applied
on the taxi population within the category.
• Contribution rate to the Open Category reduced to 20 per cent.
• Annual allowable vehicle growth rate reduced to 1.0 per cent.
2013
• Contribution rate to the Open Category reduced to 15 per cent.
• Annual allowable vehicle growth rate reduced to 0.5 per cent.
2014
• An additional engine power criterion of 130bhp (97kW) was added to delineate Cat A and
B better.
• The 5 COE categories:
Category A: Cars with engine capacity below 1,600cc and engine power below 130bhp
Category B: Cars with engine capacity above 1,600cc, or with engine power above 130bhp
Category C: Commercial – Goods vehicles and buses
Category D: Motorcycles
Category E: Open Category
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Do Dealers Profit from Fluctuations in the COE System?
Notes
References
The authors would like to thank our interns, Xin Yun
Khoo and Vivian Chow, for their contributions. We
are also grateful for MTI’s invaluable guidance and
Dr. Walter Theseira’s peer review of the paper.
1
Koh, Winston T.H. 2003. “Control of vehicle
ownership and market competition: theory and
Singapore’s experience with the vehicle quota
system,” Transportation Research Part A: Policy and
Practice, 37, Issue 9, pp. 749–770.
Vehicle ownership controls such as excise duties,
road taxes and Additional Registration Fees (ARF)
were imposed. Usage restraints included petrol
duties, the Area Licensing Scheme and the Road
Pricing Scheme; the latter two were replaced by the
Electronic Road Pricing (ERP) scheme in 1998.
Phang, Sock-Yong. 1992. “Housing Markets and
Urban Transportation: Economic Theory, Econometrics
and Policy Analysis for Singapore,” McGraw Hill,
Singapore.
See Annex C for the chronological changes to the
COE system since 1990.
Toh, Rex S. and Phang, Sock-Yong. 1997.
“Curbing urban traffic congestion in Singapore: A
comprehensive review,” Transportation Journal, 37,
pp. 24–33.
2
3
The top 5 brands in Koh’s (2003) study were Toyota,
Nissan, Honda, Mercedes Benz and Mitsubishi.
4
Our analysis uses data from 2011 to 2012 because
of the systemic changes in 2013, such as the
introduction of a feebate scheme for carbonemissions, changes to the tax structure for cars and
car loan restrictions etc., hence rendering 2013’s
data incomparable to the previous years. Please see
Annex A for the list of cars used in the regression.
5
The fixed effect model is used to capture the
variations in car package prices within the same
car model over time, controlling for time-invariant
characteristics across car models.
6
See Equation (b) in Annex 1. PositiveCOE is a dummy
variable that is 1 when the COE premiums rose in
the previous bidding exercise.
7
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Do Dealers Profit from Fluctuations in the COE System?
Low Joo Hui is currently an Economist in LTA’s Economics Unit
under Policy Division. She carries out economics research on a wide
range of transport issues, from understanding commuters’ behaviour
to analysing wider economic benefits. She aims to use economics
insights, supported by data available within the whole of Government,
to substantiate Policy and Planning decisions. She is also currently
involved in rail policies and was previously doing bus planning. She
graduated with a first class honours degree in Economics & Geography
from University College London and holds a Masters in Transportation
from Imperial College London.
Lim Yong Long is an Economist in the Policy division of the Land
Transport Authority of Singapore. His current work areas include policy
formulation, programme evaluation and impact analysis, and exploring
the use of behavioural insights and economics to shape and improve
travel behaviour. His main policy portfolio focuses on reducing reliance
on private transport and promoting active travel. Mr Lim graduated
from the University of Warwick, UK, with a Bachelor of Science in
Economics (First Class Honours) in 2011. He also received a Master of
Arts in International and Development Economics from Yale University,
USA, in 2012.
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