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

Although research has shown that the Internet has lowered the prices in some established industries, little is known about how use of the Internet lowers prices. The authors address this issue for the automobile retailing industry with matched survey and transaction data on 1500 car purchases in California. They show that the Internet lowers prices for two distinct reasons: First, the Internet informs consumers about dealers' invoice prices. Second, the referral process of online buying services helps consumers obtain lower prices. The combined information and referral price effects are −1.5%, or 22% of dealers' average gross vehicle profit. The authors also find that the benefits of gathering information differ by consumer type. Buyers who have a high disutility of bargaining but who have collected information on the specific car they eventually purchase pay 1.5% less than they otherwise would. In contrast, buyers who like the bargaining process do not benefit from such information.