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

  • Fiona Scott Morton
  • Jorge Silva-Risso
  • Florian Zettelmeyer
Article

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

References

  1. Ausubel, L. M., Cramton, P., & Deneckere, R. J. (2002). Bargaining with incomplete information. In R. J. Aumann, & S. Hart (Eds.), Handbook of game theory (Vol. 3). Amsterdam: Elsevier.Google Scholar
  2. Ausubel, L. M., & Deneckere, R. J. (1998). Bargaining and forward induction. mimeo, University of Maryland University of Wisconsin-Madison.Google Scholar
  3. Ayres, I., & Siegelman, P. (1995). Race and gender discrimination in bargaining for a new car. American Economic Review, 85(3), 304–321.Google Scholar
  4. Beatty, S. E., & Smith, S. M. (1987). External search effort: An investigation across several product categories. Journal of Consumer Research, 14(1), 83–95.CrossRefGoogle Scholar
  5. Busse, M., Silva-Risso, J., & Zettelmeyer, F. (2006). $1000 cash bank: The pass- through of auto manufacturer promotions. American Economic Review, 96(4).Google Scholar
  6. Chatterjee, K., & Lee, C. C. (1998). Bargaining and search with incomplete information about outside options. Games and Economic Behavior, 22, 203–237.CrossRefGoogle Scholar
  7. Chatterjee, K., & Samuelson, L. (1983). Bargaining under incomplete information. Operations Research, 31(5), 835–851.CrossRefGoogle Scholar
  8. Chen, Y., Yang, S., & Zhao, Y. (2003). A structural approach to modeling negotiated prices of automobiles. New York: New York University.Google Scholar
  9. Chikte, S. D., & Deshmukh, S. D. (1987). The role of external search in bilateral bargaining. Operations Research, 35(2), 198–205.CrossRefGoogle Scholar
  10. Cramton, P. (1985). Sequential bargaining mechanisms. In A. Roth (Ed.), Game theoretic models of bargaining. Cambridge: Cambridge University Press.Google Scholar
  11. Croson, R., Boles, T., & Murnighan, J. K. (2003). Cheap talk in bargaining experiments: Lying and threats in ultimatum games. Journal of Economic Behavior and Organization, 51, 143–159.CrossRefGoogle Scholar
  12. Fudenberg, D., Levine, D. K., & Tirole, J. (1985). Infinite-horizon models of bargaining with one-sided incomplete information. In A. Roth (Ed.), Game theoretic models of bargaining. Cambridge: Cambridge University Press.Google Scholar
  13. Fudenberg, D., & Tirole, J. (1991). Game theory. Cambridge: MIT Press.Google Scholar
  14. Gul, F., Sonnenschein, H., & Wilson, R. (1986). Foundations of dynamic monopoly and the coase conjecture. Journal of Economic Theory, 39, 155–190.CrossRefGoogle Scholar
  15. Harding, J., Rosenthal, S., & Sirmans, C. (2003). Estimating bargaining power in the market for existing homes. Review of Economics and Statistics, 85(1), 178–188.CrossRefGoogle Scholar
  16. Keith, K., & McWilliams, A. (1999). The returns to mobility and job search by gender. Industrial and Labor Relations Review, 52(3), 460–477.CrossRefGoogle Scholar
  17. Kennan, J., & Wilson, R. (1993). Bargaining with private information. Journal of Economic Literature, 31(1), 45–104.Google Scholar
  18. Kiefer, N., & Neumann, G. R. (1979). An empirical job-search model, with a test of the constant reservation-wage hypothesis. Journal of Political Economy, 87(1), 89–107.CrossRefGoogle Scholar
  19. Lee, C. C. (1994). Bargaining and search with recall: A two-period model with complete information. Operations Research, 42(6), 1100–1109.CrossRefGoogle Scholar
  20. Muthoo, A. (1995). On the strategic role of outside options in bilateral bargaining. Operations Research, 43, 292–297.CrossRefGoogle Scholar
  21. Narendranatha, W., & Nickell, S. (1985). Modeling the process of job search. Journal of Econometrics, 28(1), 29–49.CrossRefGoogle Scholar
  22. Peltzman, S. (1975). The effects of automobile safety regulation. Journal of Political Economy, 83(4), 677–726.Google Scholar
  23. Perry, M. (1986). An example of price formation in bilateral situations: A bargaining model with incomplete information. Econometrica, 54(2), 313–321.CrossRefGoogle Scholar
  24. Punj, G., & Staelin, R. (1983). A model of consumer information search behavior for new automobiles. Journal of Consumer Research, 9, 366–80.CrossRefGoogle Scholar
  25. Rapoport, A., Weg, E., & Felsenthal, D. S. (1990). The effects of fixed costs in two-person sequential bargaining. Theory and Decision, 28, 47–72.CrossRefGoogle Scholar
  26. Ratchford, B., & Srinivasan, N. (1993). An empirical investigation of returns to search. Marketing Science, 12(1), 73–87.CrossRefGoogle Scholar
  27. Ratchford, B. T., Talukdar, D., & Lee, M.-S. (2003). The impact of the Internet on information search for automobiles. Journal of Marketing Research, 40(2), 193–209.CrossRefGoogle Scholar
  28. Roth, A. E. (1995). Bargaining experiments. In J. H. Kagel, & A. E. Roth (Eds.), The handbook of experimental economics. Princeton: Princeton University Press.Google Scholar
  29. Rubinstein, A. (1982). Perfect equilibrium in a bargaining model. Econometrica, 50, 97–109.CrossRefGoogle Scholar
  30. Scott Morton, F., Zettelmeyer, F., & Silva-Risso, J. (2003). Consumer information and discrimination: Does the Internet affect the pricing of new cars to women and minorities?, Quantitative Marketing and Economics, 1(1), 65–92.CrossRefGoogle Scholar
  31. Srinivasan, N., & Ratchford, B. T. (1991). An empirical test of a model of external search for automobiles. Journal of Consumer Research, 18(2), 233–42.CrossRefGoogle Scholar
  32. Stern, S. (1989). Estimating a simultaneous search model. Journal of Labor Economics, 7(3), 348–369.CrossRefGoogle Scholar
  33. Stigler, G. J. (1961). The economics of information. Journal of Political Economy, 69(3), 213–225.CrossRefGoogle Scholar
  34. Thompson, L. (1990). Negotiation behavior and outcomes: Empirical evidence and theoretical issues. Psychological Bulletin, 108(3), 515–532.CrossRefGoogle Scholar
  35. Valley, K., Blount White, S., Neal, M., & Bazerman, M. (1992). Agents as information brokers: The effects of information disclosure on negotiated outcomes. Organizational Behavior and Human Decision Processes, 51, 220–236.CrossRefGoogle Scholar
  36. Weg, E., & Zwick, R. (1991). On the robustness of perfect equilibrium in fixed cost sequential bargaining under an isomorphic transformation. Economics Letters, 36(1), 21–24.CrossRefGoogle Scholar
  37. Wolinsky, A. (1987). Matching, search, and bargaining. Journal of Economic Theory, 42, 311–333.CrossRefGoogle Scholar
  38. Zettelmeyer, F., Scott Morton, F., & Silva-Risso, J. (2006). How the internet lowers prices: Evidence from matched survey and auto transaction data. Journal of Marketing Research, 43(2), 168–181.Google Scholar
  39. Zwick, R., & Lee, C. C. (1999). Bargaining and search: An experimental study. Group Decision and Negotiation, 8, 463–487.CrossRefGoogle Scholar
  40. Zwick, R., Rapoport, A., Lo, A., & Muthukrishnan, A. (2003). Consumer sequential search: Not enough or too much? Marketing Science, 22(4), 503–519.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Fiona Scott Morton
    • 1
  • Jorge Silva-Risso
    • 2
  • Florian Zettelmeyer
    • 3
  1. 1.Yale University and NBERNew HavenUSA
  2. 2.University of California, RiversideRiversideUSA
  3. 3.Northwestern University and NBEREvanstonUSA

Personalised recommendations