Race and Gender Discrimination in Bargaining for a New Car

1. Race and Gender Discrimination in Bargaining for a New Car Ian Ayres and Peter Siegelman 1995 Presentation by Shing-Yi Wang

2. Idea • Testing for discrimination in a consumer good market. • Negotiation allows sellers to treat buyers differently. • Animus or statistical discrimination?

3. Background: Other Audits • Employment • Newman (ILRR, 1978) • Neuman, Roy, and Van Nort (QJE, 1995) • Housing Market • Yinger (AER, 1986) • Taxis • Outtz et al. (1989)

4. Method: Audit Study • Pairs of testers (one always a white male) were sent to Chicago-area dealerships • Bargained for the same model at the same dealership within a few days of each other • 38 testers bargained for 306 cars (9 models) at 153 dealerships • Randomize: • choice of dealerships • assignment of pairs to dealerships • which tester in the pair goes first

5. Uniformity • Attempt to eliminate all intertester variation except for race or gender • Age: 28-32 years old. • Education: 3-4 years of postsecondary education. • Average attractiveness. • Similar “yuppie” clothing, drove in similar rented cars. • Trained to give uniform answers to questions they were likely to encounter. • Key Question: Are any differences that are not controlled for correlated with race or gender?

6. Additional Controls • Reduce “experimenter effects” (or “Hawthorne effect”) -Definition: unconscious desire to produce expected results in an experiment • Testers unaware that another tester would visit the same dealership • Testers unaware that the focus of study was discrimination

7. Testers’ Scripted Behavior First, testers got initial offer from dealer, then offered a price equal to an estimate of dealer’s marginal cost for the car. Then : two scripted bargaining strategies: • Split-the-difference: Tester responded to dealer offers by making counteroffers that averaged the dealer’s and the tester’s previous offers. • Fixed concession: Regardless of how much the seller conceded, each counteroffer by the tester increased his/her offer by 20% the difference between the sticker price and the tester’s previous offer. Ot = Ot-1 + 0.2*(SP-Ot-1) Bargaining ends when: - dealer attempted to accept tester’s offer - dealer refused to bargain further

8. Summary Statistics: Mean Price Premium Over White Men Note: White Males (18 testers, 153 obs) Concession: 44.6% Initial offer: $1000 above MC

9. Basic Econometric Model OLS: Πai = Xaiβ+ εai FE: Πai = Xaiβ+ μa+ εai • Πai : dealer profit on the ith test (i=1,2) in the ath audit (a=1,…153) • Xai : matrix of dummies for tester race & gender • μa : constant unobservable, mean-zero, audit-specific error term • Audit-specific fixed-effects regression • Exploits panel structure of data (2 obs for each of the 153 dealerships). • OLS (not including μa) will result in inefficient estimates if there are any factors unique to specific dealerships that are relevant.

11. Animus • Higher prices paid by minorities and women compensate people with animus for having to associate them. • Owner Animus - Black testers did not get better prices at black-owned dealerships • Employee Animus - Dealers made hostile race- or gender-based statements about 4% of the time. - Salespeople spent about 13% longer negotiating with minority testers than with white males. - Seller interaction variables. • Customer Animus - Length of time. - Neighborhood Effects.

13. Statistical Discrimination • Dealers use customer’s race or gender to make inferences about customer’s knowledge, search and bargaining costs and reservation price. • Search Costs • Minority tester 2.5 times more likely than white males to be asked how they got to the dealership. • Suburbs vs. city center. • Consumer Information - Consumer Federation of America: 61% of blacks versus 31% of whites believed car prices were not negotiable. - Dealers made an initial offer at sticker price to white males 9% of the time, and to others 29% of the time. • Bargaining Costs - Tastes for bargaining. - Procedural hurdles: minority testers were more often asked to put down a deposit, to sign purchase orders or to have their offers “bumped.”

14. Robustness Checks • Random Effects Model

15. Robustness Cont. 2. Individual Tester Effects Πti = Xtiβ+ μt+ εti • Look at heterogeneity across individual testers rather than across dealerships. • Magnitude and significance of race and gender dummies remained the same.

16. Robustness Cont. • Attempted Acceptances vs. Refusals to Bargain Further • Include dummy and interactions in basic regressions. • Attempted acceptances  $400 lower profit • For white males, 25.6% of negotiations ended in acceptance. For other groups, 14.9% ended in acceptance.

17. Robustness Cont. • Nonparametric Tests for Race and Gender Effects

18. Conclusion • This study finds evidence of discrimination in the new car market, but it is difficult to explain the source of discrimination. • While there is some weak evidence of animus, they conclude that the ancillary evidence more strongly supports statistical discrimination.

19. Discussion • How well does this experiment generalize into market outcomes? • Jake • Strong evidence for discrimination, but need further work to understand the reasons for differentials in markups. • Further research: • Look at Saturn (no negotiating on prices)