Zettelmeyer, Florian, Fiona Scott Morton, and Jorge Silva-Risso, "Cowboys or Cowards: Why are Internet Car Prices Lower?," (November 2005).
This paper provides evidence that consumer use of Internet referral services lowers purchase prices in an important established offline industry, the retail auto industry. We analyze a large dataset of transaction prices for new automobiles and referral data from Autobytel.com. Using an instrumental variables approach to control for selection, we find that buying a car through Autobytel.com reduces the price a consumer pays by approximately 2.4%. This is in contrast to the on average 1% lower prices that online buyers pay compared to offline consumers, for the same car. 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 findings are consistent with consumers choosing to use Autobytel.com 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. We estimate that savings to this initial group of early adopters who use Autobytel.com 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 - at least at the time of our study - the Internet is facilitating a substantial redistribution of surplus in the retail auto industry. Download pdf