Dealer Price Discrimination in New Car Purchases

Evidence from the Consumer Expenditure Survey Andreas Argyris

Previous Studies » 1985, Bresnahan & Reiss- product lines responsible for dealer mark ups; no difference in treatment of individual buyer » 1995, Ayres &Siegelman- race, gender causes differences

Ayres & Siegelman » Initial offers higher: $200 for white women, $450 for black women, $1100 for black men » Similar differences for final price » Controlled experiment- testers in Chicago

Pinelopi Goldberg » Uses micro data on actual purchases and transaction prices of new cars » Data from Consumer Expenditure Survey (CES) 1983-1987

CES Information » Large set of household characteristics, stock of owned vehicles, trade-in, financing.

» Control for different backgrounds, financial ability, previous car buying experience

Reasons for Different Results » In experiment, buyers have different demand behaviors, dealers adjust appropriately » If reservation price is high, final price will also be high

Equation » On the board » Discount=-Markup + (list price wholesale price) » Higher discounts=lower markups » Last term is not dependent on consumer attributes- taken from

Consumer Reports

Some info problems » Inaccurate model information and purchase of additional options » Trade-in allowance » Sales tax » Financing » Dealer-specific costs (destination fees, dealer prep fees…)

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Results » If final prices not related to household characteristics, why negotiate? » Because of variance in discounts profit maximizing strategy for dealers

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