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

Fiona Scott Morton; Jorge Silva-Risso; Florian Zettelmeyer

doi:10.1007/s11129-011-9108-1

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

Marketing

Research output: Contribution to journal › Article › peer-review

33 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 language	English (US)
Pages (from-to)	365-402
Number of pages	38
Journal	Quantitative Marketing and Economics
Volume	9
Issue number	4
DOIs	https://doi.org/10.1007/s11129-011-9108-1
State	Published - Dec 2011

Funding

Acknowledgements We thank Joe Altonji, Eric Anderson, Linda Babcock, Steve Berry, Severin Borenstein, Colin Camerer, Keith Chen, David Levine, Preston McAfee, Yesim Orhun, Jose Silva, and seminar participants at the University of British Columbia, New York University, Stanford University, University of California at Berkeley, the University of Southern California, and the Yale University IO lunch for helpful comments. We are particularly indebted to Meghan Busse for extensive comments and suggestions. Scott Morton and Zettelmeyer gratefully acknowledge support from the Economics Program of the National Science Foundation (Grant No. SES-0111885).

Keywords

Auto industry
Bargaining
Consumer characteristics
Search
Survey

ASJC Scopus subject areas

Economics, Econometrics and Finance (miscellaneous)
Marketing

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10.1007/s11129-011-9108-1

Cite this

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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.",

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

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