How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data∗

While research has shown that the Internet has lowered the prices in some established industries, we know little about how using the Internet lowers prices. We answer this question for the auto retailing industry with matched survey and transaction data on 1,500 car purchases in California. We show that the Internet lowers prices for two distinct reasons. First, the Internet informs consumers about the invoice price of dealers. Second, the referral process of online buying services helps consumers obtain lower prices. The combined information and referral price effects are -1.5%, or 22% of dealers’ average gross vehicle profit. We also find that the benefits of gathering information differ by consumer type. Buyers who have a high disutility of bargaining but who have collected information on the specific car they eventually purchase pay 1.5% less than they otherwise would. In contrast, buyers who like the bargaining process do not benefit from such information.