Should you buy cars online?

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This paper investigates the effect of Internet car referral services on dealer pricing of automobiles in California. Combining data from J.D. Power and Associates and, a major online auto referral service, we compare online transaction prices to regular “street” prices. We find that the average customer of this online service pays approximately 2% less for her car, which corresponds to about $450 for the average car. About 25% percent of the savings comes from making the purchase at a low-price dealership affiliated with the web service. The remaining 75% of the savings are due to a combination of information provision by the referral service, bargaining by the service on behalf of consumers, and cost efficiencies. Dealer price dispersion declines with online sales, indicating we are picking up more than a selection effect. Online consumers who indicate they are ready to buy in the next two days pay even lower prices. Dealers pay less for an online customer’s trade-in vehicle, although on-line customers are still better off overall than offline customers. Dealer average gross margin on an online vehicle sale is lower than an equivalent offline sale. However, because online consumers may be cheaper to serve and online sales are likely to be new business for the dealerships, dealers may gain in absolute terms from web affiliation. Consumers who use the web pay less than at least 61% of offline consumers, conditional on the car being purchased.

Source: Scott Morton, Fiona M., Zettelmeyer, Florian and Silva-Risso, Jorge M., “Internet Car Retailing” (February 2001).

I found this study in Thaler and Sunstein’s interesting book Nudge: Improving Decisions About Health, Wealth, and Happiness.

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