Cowboys or Cowards: Why are Internet Car Prices Lower?

35 Pages Posted: 31 Oct 2001  

Florian Zettelmeyer

University of California, Berkeley - Marketing Group; National Bureau of Economic Research (NBER)

Fiona M. Scott Morton

Yale School of Management; National Bureau of Economic Research (NBER)

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

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.

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

JEL Classification: L1, O3

Suggested Citation

Zettelmeyer, Florian and Scott Morton, Fiona M. and Silva-Risso, Jorge M., Cowboys or Cowards: Why are Internet Car Prices Lower? (October 2001). Yale SOM Working Paper No. ES-16; Haas School, UC Berkeley Marketing Working Paper No. 01-1. Available at SSRN: https://ssrn.com/abstract=288601 or http://dx.doi.org/10.2139/ssrn.288601

Florian Zettelmeyer (Contact Author)

University of California, Berkeley - Marketing Group ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-643-1898 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fiona M. Scott Morton

Yale School of Management ( email )

New Haven, CT 06520
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jorge M. Silva-Risso

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

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