How Good Are You at Getting a Lower Price? A Field Study of the US Automobile Market

Abstract

Many large ticket items, such as cars and real estate, involve extensive bargaining on the part of consumers. From a consumer protection perspective, it is thus important to understand the determinants of bargaining outcomes and identify ways in which consumers can improve their bargaining performance. This research identifies several situational factors, including the information available to the consumer, the promotional environment, and a customer’s trade-in, that may have an impact on the bargaining outcome. A unique dataset is created from the US automobile market that combines actual vehicle transaction data with survey data on buyer search and bargaining behaviour. The results show that these situational variables indeed have an impact on the price a consumer pays. Specifically, on average, consumers who used the Internet and those that were offered a manufacturer rebate saved $481 and $2,126, respectively, while consumers who traded-in their old vehicle ended up paying $159 more on the new car compared to consumers who did not trade-in. Interestingly, the impact of some of these situational variables differed depending on the consumers’ ability to bargain and their enjoyment of bargaining. For example, high ability bargainers achieved more price reductions than low ability bargainers, given more information and a more active promotional environment, but this advantage did not extend in overcoming the negative impact of a trade-in. On the other hand, while buyers who enjoy bargaining do not possess a better position in a bargaining situation, they have greater tendency to search for price information and thus are better at identifying suppliers that offer a lower initial price. From a policy perspective, these results suggest that information search should be encouraged and made easier, particularly for consumers who dislike bargaining. Furthermore, even if some consumers have a high bargaining ability, there are still circumstances where their ability to get a lower price is limited. Education that highlights these pitfalls is likely to improve the final bargaining outcome and thus enhance consumer welfare.

Appendix

A. The List of Information Types

• (1) Price-related information

  • Dealer cost/invoice of new vehicle

  • Trade-in values

  • Tool to show how much dealers are discounting vehicles (transaction price)

  • Tool to calculate the list price (MSRP) of a vehicle with the options you want

  • Information about rebates and special offers

  • Tool to calculate monthly payments at different interest rates

• (2) Non-price information

  • Options and features information (descriptions, gas mileage, etc.)

  • Vehicle photographs (exterior, interior, etc.)

  • Road tests and reviews about vehicles

  • Search dealer inventories to find vehicles in stock

  • Reliability/dependability ratings of vehicles

  • Safety information (crash test results, etc.)

  • Compare vehicles side-by-side (standard equipment, prices, etc.)

  • Information about dealers in your area (directions, hours, etc.)

  • Request or print brochure

Note: For each type of information, buyers indicate whether or not they found it online and, if so, where they found it (i.e., independent/dealership/manufacturer website). Although “Compare vehicles side-by-side” is also related to price information, this item is less relevant as most tools online that allow for side-by-side comparison compare the prices of different models within one dealer rather than prices of the same model across dealers. Nonetheless, the study checks the model if classifying this information as price information and finds that the results are similar and do not change the conclusions

B. The List of Shopping Attitude and Behaviour Items

• Compared to most people, I’m a very good negotiator

• I actually enjoy negotiating with dealers

• Getting the lowest price is more important to me than finding a dealer that provides friendly customer service

• I will shop as many dealers as it takes to get the absolute lowest price

• I spend very little time shopping for a vehicle

• I spend many hours researching before I visit dealers

• I enjoy reading enthusiast magazines about cars and trucks

• I always enjoy shopping for a vehicle

• People often ask me for advice about what car to buy

• Most dealers try very hard to make sure their customers are happy

• Most car salespeople will lie to make a sale

Note: For each item, buyers indicate their agreement using a five-point scale: 1 = I don’t feel that way at all, 2 = I don’t necessarily feel that way, 3 = I don’t care one way or the other, 4 = I feel kind of like that, and 5 = That’s exactly how I feel.