There is convincing evidence that the Internet has lowered the prices that some consumers pay in established industries, such as term life insurance and car retailing. However, current research does not reveal much about how using the Internet lowers prices. This article answers this question for the automobile retailing industry. The authors use direct measures of search behavior and consumer characteristics to investigate how the Internet affects negotiated prices in car retailing. They match transaction data on 1500 car purchases in California with responses to a survey that asks buyers detailed questions about their Internet usage, their attitudes toward information search and bargaining, and their demographics.
The authors show that the Internet lowers prices for two distinct reasons: First, the Internet informs consumers. The most important piece of information consumers learn on the Internet is the dealers’ invoice prices; in contrast, Internet information does not help consumers find low-price dealerships. Second, the referral process of online buying services, a novel institution made possible by the Internet, also helps consumers obtain lower prices. The results show combined information and referral price effects of –1.5%. This corresponds to 22% of dealers’ average gross profit margin per vehicle. The authors also find that the benefits of gathering information differ by consumer type. Buyers who have a high disutility of bargaining but have collected information on the specific car they eventually purchase pay 1.5% less than they would otherwise. In contrast, buyers who like the bargaining process do not benefit from such information.
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 they pay.
Florian Zettelmeyer is Associate Professor of Marketing in the Haas School of Business at University of California, Berkeley. Before his appointment at Berkeley in 1998, he was on the faculty of the Simon Graduate School of Business at the University of Rochester. He is also a faculty research fellow of the National Bureau of Economic Research. He specializes in evaluating the effects of information technology on firms’ product-market behaviors. In general, his work addresses how the information that consumers have about firms and the information that firms have about consumers affect firm behavior. Professor Zettelmeyer received a Vordiplom in Business Engineering from the University of Karlsruhe (Germany), an MSc in Economics from the University of Warwick (UK), and a PhD in Marketing from the Massachusetts Institute of Technology.
Fiona Scott Morton is Professor of Economics in the Yale School of Management. She has a BA from Yale and a PhD from the Massachusetts Institute of Technology, both in Economics. Her research is in the area of empirical industrial organization as it applies to a wide range of settings, such as pharmaceuticals, shipping, wine, funeral services, magazines, and automobiles. She teaches competitive strategy and ecommerce strategy.
Jorge Silva-Risso is Assistant Professor of Marketing in the A. Gary Anderson Graduate School of Management at the University of California, Riverside, which he joined after more than seven years as Executive Director of Marketing Science at J.D. Power and Associates. He holds a Ph.D. in Management (1996) and an MBA (1991) from University of California, Los Angeles. His research interests include econometric models of consumer response, marketing productivity, and the effects of the Internet on consumer behavior. His work has been published in Journal of Marketing Research, Marketing Science, Journal of Econometrics, Journal of Industrial Economics, Journal of Marketing, Quantitative Marketing and Economics, and Journal of Product and Brand Management. His doctoral dissertation received the Alden G. Clayton Award from the Marketing Science Institute.
J Marketing Research, Volume 43, Number 2, May 2006
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