A Test of Bargaining Theory in the Auto Retailing Industry∗

This paper tests predictions from bargaining theory about how private information, patience, and bargaining disutility affect the division of surplus between negotiating parties. We do so using the responses to a novel survey of 1,500 new car buyers in California that asks buyers detailed questions about their bargaining behavior, their search for information, and their individual characteristics. We match the answers to this survey with detailed transaction data on the purchased car and its negotiated price. Consistent with theoretical predictions we find, first, that consumers who know the invoice price of the vehicle (a measure of the dealer’s reservation price) pay on average 0.6% less than consumers who do not. Second, we find that consumers who have an offer from a competing dealer (a measure of how much consumers know about their outside options) pay 0.6% less. Third, we find that buyers who indicated that they were patient during search paid 0.5% less than other consumers. Finally, we find that a buyer who according to our measures had the lowest bargaining disutility paid on average 1.5% less than a buyer who had the highest bargaining disutility. This paper confirms that the factors predicted to matter by bargaining theory really do—including knowledge of the other party’s position, knowledge of one’s own outside options, patience, and bargaining disutility. To the best of our knowledge, this paper is among the first to analyze how private information affects price negotiations between individuals outside the laboratory.