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

Florian Zettelmeyer, Fiona Scott Morton and Jorge Silva-Risso

No 11515, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D82 L11 L15 L62 M31 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-com and nep-mic
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Published as Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2006. "How the Internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data," Journal of Marketing Research, vol 43(2), pages 168-181.

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