Winter 2007

Power of Ideas

Cruising the Net for New Cars

Prof. Florian Zettelmeyer shows how the Internet helps some car buyers save money


Shopping for a new car can drive even the most relaxed consumer over the edge, but new research by Associate Professor Florian Zettelmeyer found that the Internet can bring some relief by boosting a buyer's negotiating power.


Checking a car's invoice price online and using an Internet car buying referral site can help consumers get a lower price at the dealership, Zettelmeyer found in a study of 1,436 car purchases. He outlined his findings in an article titled "How the Internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data" (Journal of Marketing Research, May 2006).


Zettelmeyer, with co-authors Fiona Scott Morton of Yale University and Jorge Silva-Risso of UC Riverside, found that buyers paid about 1.5% less for a car when they checked the Internet for the invoice price and used an online car buying referral service. That equals about $375 based on an average car price of $25,000 and represents about 22% of dealers' average gross profit margin per vehicle.


"For people who dislike the bargaining process, this is a huge deal because the information gives them the backbone to ask dealers for a larger discount," Zettelmeyer says.


One surprising result, however, was that the Internet did not help consumers who actually like bargaining get a lower price at the dealership. Good bargainers, by definition, are able to negotiate well with little information, Zettelmeyer explains.


"The Internet is a great equalizer," Zettelmeyer concludes, "because it differentially helps those people more who have so far been worse off in car buying."


Zettelmeyer has also recently shown that buyers get a lower price when car manufacturers offer consumer rebates rather than dealer rebates. Those findings, outlined in the article "$1000 Cash Back: The Pass-Through of Auto Manufacturer Promotions" (American Economic Review, September 2006), suggest consumers should check the Internet to find out about dealer rebates before buying a car.


"It turns out whether or not you are informed makes a huge difference in what you pay," Zettelmeyer says.


Zettelmeyer and co-authors Silva-Risso and Haas School Adjunct Professor Meghan Busse found that 70% to 90% of customer rebates from car manufacturers trickle down as discounts to car buyers. But only 30% to 40% of dealer rebates from manufacturers are passed down to buyers by dealers. That difference equates to about $500 for a typical promotion. Zettelmeyer believes it is caused by the fact that consumers often don't know about dealer rebates.


Zettelmeyer's findings also shed some light on a marketing debate over push and pull marketing. The push promotion occurs when a manufacturer gives a rebate to a dealer, prompting the dealer to "push" the product, while a pull promotion occurs when the manufacturer offers a rebate directly to the customer and the
customer "pulls" the product from the dealer.


"If the objective is to lower the price because you want to sell more, then this study suggests that these pull promotions are more effective in the automotive industry than the push promotions," Zettelmeyer says.


Zettelmeyer first began studying Internet car retailing more than six years ago because the heavily regulated automobile industry was one of the few fields whose market structure was not changed by the Internet. Consequently, he says, Internet auto retailing offered a clean way of measuring the effect of new information made available by the Internet.

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"The Internet is a great equalizer because it differentially helps those people more who have so far been worse off in car buying."

--Professor Florian Zettelmeyer