01.16.07
Zettelmeyer Shows Cruising the Internet Helps Some Car Buyers

.

Shopping for a new car can drive even the most relaxed consumer over the edge, but new research by Florian Zettelmeyer, an associate professor in the Haas Marketing Group, 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" in the May 2006 issue of the Journal of Marketing Research.

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.

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

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" in the September issue of the American Economic Review, 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.

In related research, Zettelmeyer and co-authors Jorge Silva-Risso of UC Riverside 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.

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