The Effect of Information and Institutions on Price Negotiations: Evidence from Matched Survey and Auto Transaction Data∗

Using matched survey and transaction data on 1,500 buyers, we investigate how different types of search and purchasing behavior affect transaction prices in auto retailing. Our results are consistent with the predictions of information economics and bargaining theory. Buyers pay less if they obtain an offer from a competing dealer (0.6% of purchase price), if they are informed about the specific car they eventually purchase (0.8%), and if they are patient (0.6%). The combined savings of these effects equal 1/3 of the average dealer margin. We find that the Internet lowers prices because it informs consumers (0.9%), and because the referral process of online buying services helps consumers (0.7%). We also find that buyers who perceive themselves as vulnerable in negotiation are more likely to benefit from the Internet. Such buyers pay 1.5% less when they use the Internet to inform themselves, while buyers who enjoy the bargaining process do not obtain a lower price when they are informed. These results suggest that tactical decisions consumers make to improve their price negotiation outcomes have surplus redistributing effects. The results speak both to the significance of the Internet in making information more easily available, and also to the potential of Internet institutions to affect the distribution of surplus even in established offline industries like auto retailing.