Haas Newsroom

Expert Advice: Cruise the Internet Before Buying a Car

Dec. 7, 2006

Media Contacts:
Ute S. Frey
UC Berkeley Haas School of Business

Ronna Kelly
UC Berkeley Haas School of Business

Shopping for a new car can drive even the most relaxed consumer over the edge.

However, new research by a marketing professor at the University of California, Berkeley's Haas School of Business shows that the Internet can help with this often trying experience by boosting a buyer's negotiating power.

Checking a car's invoice price online and using an Internet car buying referral site can help consumers get a lower price at the dealership, Haas Associate Professor of Marketing Florian Zettelmeyer found in a study of 1,436 car purchases. He outlined his findings in an article titled "How the Internet Lowers Prices: Evidence from Matched Survey and Automobile Transaction Data" in the May issue of the Journal of Marketing Research.

In a more recent article, Zettelmeyer showed that buyers get a lower price when car manufacturers offer consumer rebates instead of dealer rebates, primarily because consumers frequently don't know about dealer rebates. Those findings, outlined in the article "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions" in the latest issue (September 2006) of the American Economic Review, suggest consumers should check the Internet to find out about dealer rebates before buying a car.

"It turns out whether or not you are informed makes a huge difference in what you pay," Zettelmeyer says.

In the first article, Zettelmeyer and co-authors Fiona Scott Morton of Yale University and Jorge Silva-Risso of the University of California, Riverside, found that buyers paid about 1.5% less for a car when they checked the Internet for the invoice price and used an online car buying referral service. That equals about $375 based on an average car price of $25,000 and represents about 22% of dealers' average gross profit margin per vehicle.

"For people who dislike the bargaining process, this is a huge deal because the information gives them the backbone to ask dealers for a larger discount," Zettelmeyer says.

However, one surprising finding was that consumers who like to bargain did not get lower prices when they checked the Internet for information.

"If you are a good bargainer, information doesn't matter," Zettelmeyer says. That's because good bargainers, by definition, are able to negotiate well with little information, he explains.

"The Internet here is a great equalizer in a way because it differentially helps those people more who have so far been worse off in car buying," Zettelmeyer concludes.

In the second study, on automobile rebates, Zettelmeyer and co-authors Silva-Risso and Meghan Busse, an assistant adjunct professor at the Haas School, found that 70% to 90% of customer rebates from car manufacturers trickle down as discounts to car buyers, while only 30% to 40% of dealer rebates from manufacturers are passed through to buyers by dealers. That equates to a difference of about $500 for a typical promotion and is caused by the fact that consumers often don't know about dealer rebates.

"Car shoppers are better off if the manufacturer offers a direct-to-consumer rebate as opposed to a dealer rebate," Zettelmeyer says.

But some car makers such as Honda never offer direct consumer rebates, he notes. For those models, consumers should check the Internet to find out if manufacturers are offering dealer rebates in order to boost their position at the negotiating table, Zettelmeyer advises.

Zettelmeyer's findings also shed some light on a marketing debate over push and pull marketing. The push promotion occurs when a manufacturer gives a rebate to a dealer, prompting the dealer to "push" the product, while a pull promotion occurs when the manufacturer offers a rebate directly to the customer and the customer "pulls" the product from the dealer.

"If the objective is to lower the price because you want to sell more, then this study suggests that these pull promotions are more effective in the automotive industry than the push promotions," Zettelmeyer says.

Zettelmeyer first began studying Internet car retailing more than six years ago because the heavily regulated automobile industry was one of the few fields whose market structure was not changed by the Internet. Consequently, he says, Internet auto retailing offered a clean way of measuring the effect of new information made available by the Internet.

For a copy of "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," visit http://flomac.haas.berkeley.edu/~florian/Papers/passthrough.pdf.

For a copy of "How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data," visit http://flomac.haas.berkeley.edu/~florian/Papers/howinternetjmr.pdf.