What matters in a price negotiation: Evidence from the U.S. auto retailing industry

Fiona Scott Morton, Jorge Silva-Risso, Florian Zettelmeyer*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

19 Scopus citations

Abstract

While there is a great deal of theoretical and experimental literature on what factors affect bargaining outcomes, there is little empirical work based on data from real markets. In this paper we analyze negotiations for new cars, a $340 billion industry in the United States in 2010. Our results suggest that search costs, incomplete information, and bargaining disutility have an economically significant effect in real-world negotiations: we estimate that relative to an uninformed consumer, a consumer with basic information about the seller's reservation price and his own outside options captures 15% of the average dealer margin from selling an automobile. We also find that a buyer'ssearch cost and bargaining disutility have significant effects on bargaining outcomes. Finally, our results show that while search is common, there remains a substantial group of consumers who do not engage in any of the search behaviors we measure. We hypothesize that these buyers are not aware of how easy and effective certain activities in improving negotiation outcomes can be.

Original languageEnglish (US)
Pages (from-to)365-402
Number of pages38
JournalQuantitative Marketing and Economics
Volume9
Issue number4
DOIs
StatePublished - Dec 2011

Keywords

  • Auto industry
  • Bargaining
  • Consumer characteristics
  • Search
  • Survey

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)
  • Marketing

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