How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data

33 Pages Posted: 14 Sep 2005 Last revised: 19 Dec 2022

See all articles by Florian Zettelmeyer

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

Date Written: August 2005

Abstract

There is convincing evidence that the Internet has lowered the prices paid by some consumers inestablished industries, for example, term life insurance and car retailing. However, current researchdoes not reveal much about how using the Internet lowers prices. This paper answers this questionfor the auto retailing industry. We use direct measures of search behavior and consumercharacteristics to investigate how the Internet affects negotiated prices. We show that the Internetlowers prices for two distinct reasons. First, the Internet helps consumers learn the invoice price ofdealers. Second, the referral process of online buying services, a novel institution made possible bythe Internet, also helps consumers obtain lower prices. The combined information and referral priceeffects are -1.5%, corresponding to 22% of dealers' average gross profit margin per vehicle. We alsofind that buyers with a high disutility of bargaining benefit from information on the specific car theyeventually purchased while buyers who like the bargaining process do not. The results suggest thatthe decisions consumers make to use the Internet to gather information and to use the negotiatingclout of an online buying service have a real effect on the prices paid by these consumers.

Suggested Citation

Zettelmeyer, Florian and Scott Morton, Fiona M. and Silva-Risso, Jorge M., How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data (August 2005). NBER Working Paper No. w11515, Available at SSRN: https://ssrn.com/abstract=776003

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
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Fiona M. Scott Morton

Yale School of Management ( email )

493 College St
New Haven, CT 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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