Internet Equalizes Car Prices
April 24, 2003
Car buyers are increasingly getting price offers from Internet referral services like Autobytel, the market leader, and CarsDirect. In 1999 about 12 percent of car shoppers used the services, versus 58 percent in 2002.
These services contract with car dealers who agree to follow certain rules. Only about one out of five dealers has a referral-service contract, which encourages lots of sales at relatively low prices. When a car shopper fills out an online form, the referral service forwards the information to its local affiliates, which responds with price offers.
Economist Florian Zettelmeyer and colleagues analyzed surveys of car buyers in two recent studies. They found:
- Consumers who use Internet referral services pay about 2 percent less for their cars than people who shop the old-fashioned way.
- They found that about two-thirds of the 2 to 2.3 percent average premium that blacks and Hispanics pay for cars was due to such factors as whether they already owned a car or traded in a used one.
- Using an Internet referral service eliminates the remaining markup -- 0.8 percent for blacks, 0.6 percent for Hispanics -- but wipes out the differences from education, income and search costs.
Internet shopping lowers prices in two ways. Using the Internet makes consumers better informed and, hence, better able to bargain -- the information effect. And the referral services use their own power to make sure dealers keep prices low -- the contract effect.
Source: Virginia Postrel, "How Much Is That Civic Online?" Economic Scene, New York Times, April 24, 2003.
For study text http://papers.ssrn.com/abstractid=288601
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