Quantitative Marketing and Economics

, Volume 9, Issue 4, pp 365–402

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

Authors

  • Fiona Scott Morton
    • Yale University and NBER
  • Jorge Silva-Risso
    • University of California, Riverside
    • Northwestern University and NBER
Article

DOI: 10.1007/s11129-011-9108-1

Cite this article as:
Scott Morton, F., Silva-Risso, J. & Zettelmeyer, F. Quant Mark Econ (2011) 9: 365. doi:10.1007/s11129-011-9108-1

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’s search 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.

Keywords

Bargaining Search Consumer characteristics Survey Auto industry

JEL Classification

D82 L11 L15 L62 L81 M31

Supplementary material

11129_2011_9108_MOESM1_ESM.pdf (92 kb)
(PDF 93 KB)

Copyright information

© Springer Science+Business Media, LLC 2011