December 21, 2001

African-Americans, Hispanics and Women Benefit from Buying Cars on Internet

Does the Internet affect the pricing of new cars for women and minorities?

Yes. A recent study by researchers at the University of California, Berkeley, and Yale University found that the Internet serves as an equalizer for those whose demographic characteristics might end up costing them at a car dealership - primarily African-Americans, Hispanics, and women.

The study, "Consumer Information and Price Discrimination," was conducted by Florian Zettelmeyer, marketing professor at the UC Berkeley's Haas School of Business, and Fiona Scott Morton, marketing professor at Yale's School of Management, and Jorge Silva-Risso of J.D. Powers and Associates. Car purchase data was provided by J.D. Power and Internet usage data by Auto-bytel.com.

The researchers found that minority buyers pay about 2.0 percent more than white consumers (or about $500 on the average car), however, most of this premium is due to differing income, education and search costs. This might be expected because car prices are negotiated and socio-economic characteristics can influence the bargaining skills of consumers. For example, people who come from neighborhoods with a higher percentage of college-educated residents were found to pay lower prices at the dealership than the average consumer. Women pay a very small amount more, 0.2 percent (about $45 on the average car), than men pay on average.

The researchers found no evidence that minorities, or women, dislike bargaining or shop at more expensive dealerships. Rather, they concluded instead that the cost of searching for a good price on a car is higher, on average, for minority consumers. Lower levels of income and education, on average, mean minorities are not as successful in negotiating low prices. In addition, Manning and Winston (1991) report that minorities are less likely to own a car while shopping for a car; this makes comparison shopping more difficult and therefore raises the average price minorities pay.

Shopping on the Internet eliminates the factors that raise the cost of car shopping for women and minorities, according to the study. Data from the referral service Autobytel.com showed that minorities paid the same prices as non-minorities, regardless of their level of education, income, and search costs. The study did not reveal any evidence of statistical race discrimination.

Said Berkeley's Zettelmeyer, "African-Americans and Hispanics, consumers who are least likely to use the Internet, are the ones who would benefit the most from it."

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