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Cowboys or Cowards: Why are Internet Car Prices Lower?

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Author Info

  • Florian Zettelmeyer

    () (Marketing Group)

  • Fiona M. Scott Morton

    () (School of Management)

  • Jorge Silva-Risso

    () (Anderson School of Management)

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    Abstract

    This paper addresses the question of how much the Internet lowers prices for new cars and why. Using a large dataset of transaction prices for new automobiles and referral data from Autobytel.com, we find that online consumers pay on average 1.2% less than do offline consumers. After controlling for selection, we find that using Autobytel.com reduces the price a consumer pays by approximately 2.2%. This suggests that consumers who use an Internet referral service are not those who would have obtained a low price even in the absence of the Internet. Instead, our finding is consistent with consumers choosing to use Autobytel.com because they know that they would do poorly in the traditional channel, perhaps because they have a high personal cost to collecting information and bargaining. This group disproportionately uses Autobytel.com because its members are the ones with the most to gain. We estimate that savings to consumers who use Autobytel.com alone are at least $240 million per year. Since there are other referral and informational sites that may also help consumers bargain more effectively with dealers, we conclude that the Internet is facilitating a large transfer of surplus to Internet consumers in the retail auto industry.

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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=288601
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    Bibliographic Info

    Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm241.

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    Date of creation: 31 Oct 2001
    Date of revision:
    Handle: RePEc:ysm:somwrk:ysm241

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    Web page: http://icf.som.yale.edu/
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    Related research

    Keywords: Internet; Selection; Car; Auto; E-commerce; Disintermediation;

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    Cited by:
    1. Tamar Kugler & Zvika Neeman & Nir Vulkan, 2003. "Markets Versus Negotiations: An Experimental Investigation," Discussion Paper Series dp319, The Center for the Study of Rationality, Hebrew University, Jerusalem.
    2. Copeland, Adam & Hall, George J., 2005. "Prices, Production and Inventories over the Automotive Model Year," Working Papers 2, Yale University, Department of Economics.
    3. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2001. "Consumer Information and Price Discrimination: Does the Internet Affect the Pricing of New Cars to Women and Minorities?," NBER Working Papers 8668, National Bureau of Economic Research, Inc.
    4. Anindya Ghose & Tridas Mukhopadhyay & Uday Rajan, 2003. "Strategic Benefits of Referral Services," Review of Marketing Science Working Papers 2-2-1022, Berkeley Electronic Press.

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