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Cowboys or Cowards: Why are Internet Car Prices Lower?

  • Florian Zettelmeyer
  • Fiona Scott Morton
  • Jorge Silva-Risso
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    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://www.nber.org/papers/w8667.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8667.

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    Date of creation: Dec 2001
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    Handle: RePEc:nbr:nberwo:8667
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    1. Brown, Jeffrey, 2000. "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," Working Paper Series rwp00-007, Harvard University, John F. Kennedy School of Government.
    2. Joshua Angrist, 1999. "Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," Working papers 99-31, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
    4. James J. Heckman, 1977. "Dummy Endogenous Variables in a Simultaneous Equation System," NBER Working Papers 0177, National Bureau of Economic Research, Inc.
    5. Yuxin Chen & Ganesh Iyer & V. Padmanabhan, 2002. "Referral Infomediaries," Marketing Science, INFORMS, vol. 21(4), pages 412-434, May.
    6. Ganesh Iyer & Amit Pazgal, 2003. "Internet Shopping Agents: Virtual Co-Location and Competition," Marketing Science, INFORMS, vol. 22(1), pages 85-106, November.
    7. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
    8. Morton, Fiona Scott & Zettelmeyer, Florian & Silva-Risso, Jorge, 2001. "Internet Car Retailing," Journal of Industrial Economics, Wiley Blackwell, vol. 49(4), pages 501-19, December.
    9. Fiona Scott Morton & Florian Zettelmeyer & Jorge Silva-Risso, 2001. "Internet Car Retailing," NBER Chapters, in: E-commerce, pages 501-519 National Bureau of Economic Research, Inc.
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