TY - JOUR AU - Zettelmeyer,Florian AU - Morton,Fiona Scott AU - Silva-Risso,Jorge TI - How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data JF - National Bureau of Economic Research Working Paper Series VL - No. 11515 PY - 2005 Y2 - August 2005 UR - http://www.nber.org/papers/w11515 L1 - http://www.nber.org/papers/w11515.pdf N1 - Author contact info: Florian Zettelmeyer Northwestern University Kellogg School of Management Marketing Department, Fourth Floor 2001 Sheridan Road Evanston, IL 60208 Tel: 847-467-0932 Fax: 847-491-2498 E-Mail: f-zettelmeyer@kellogg.northwestern.edu Fiona Scott Morton Yale School of Management Box 208200 New Haven, CT 06520-8200 Tel: 203/432-5569 Fax: 203/432-6974 E-Mail: fiona.scottmorton@yale.edu Jorge Silva-Risso M2 - featured in NBER digest on 2005-08-01 AB - There is convincing evidence that the Internet has lowered the prices paid by some consumers in established industries, for example, term life insurance and car retailing. However, current research does not reveal much about how using the Internet lowers prices. This paper answers this question for the auto retailing industry. We use direct measures of search behavior and consumer characteristics to investigate how the Internet affects negotiated prices. We show that the Internet lowers prices for two distinct reasons. First, the Internet helps consumers learn the invoice price of dealers. Second, the referral process of online buying services, a novel institution made possible by the Internet, also helps consumers obtain lower prices. The combined information and referral price effects are -1.5%, corresponding to 22% of dealers' average gross profit margin per vehicle. We also find that buyers with a high disutility of bargaining benefit from information on the specific car they eventually purchased while buyers who like the bargaining process do not. The results suggest that the decisions consumers make to use the Internet to gather information and to use the negotiating clout of an online buying service have a real effect on the prices paid by these consumers. ER -