Cowboys or Cowards: Why are Internet Car Prices Lower?

Florian Zettelmeyer, Fiona Scott Morton, Jorge Silva-Risso

NBER Working Paper No. 8667
Issued in December 2001
NBER Program(s):   IO

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, we find that online consumers pay on average 1.2% less than do offline consumers. After controlling for selection, we find that using 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 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 because its members are the ones with the most to gain. We estimate that savings to consumers who use 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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Document Object Identifier (DOI): 10.3386/w8667

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