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Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996). Presented by Jake Gramlich October 12, 2004. Introduction. Is there price discrimination in the new car market? Ayres & Siegelman (1995) Audit Study: yes

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slide1

Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure SurveyPinelopi Goldberg (JPE, 1996)

Presented by Jake Gramlich October 12, 2004

introduction
Introduction
  • Is there price discrimination in the new car market?
  • Ayres & Siegelman (1995)
    • Audit Study: yes
  • Goldberg (1996)
    • Microdata: no
  • How can we reconcile these two findings?
    • Second moments of reservation prices
slide3
Two-part paper:

1. Present evidence from the Consumer Expenditure Survey (CES) that contradicts Ayres & Siegelman’s findings of racial and gender discrimination

2. Reconcile the two studies by looking at second moments of discounts (and thus implied reservation prices)

microdata approach
Microdata approach
  • Instead of audit method, use microdata (CES) on actual purchases and transaction prices of new cars
  • Advantages relative to audit method:
    • Data are on actual purchases
    • Nationwide (not Chicago area)
    • More car models (not just 9 representative models)
  • Disadvantage relative to audit method
    • No controlled environment
      • Only household data
      • No dealership data
slide5
Data
  • CES, 1983-1987, quarterly, pooled
  • Household’s asked:
    • Household characteristics
    • Household car purchase activity
    • Household’s stock of owned vehicles
    • Disposal of old cars
    • Trade-in
    • Financing
  • Representative of U.S. population
  • 32,000 households; 3,000 bought cars; 1,279 bought from dealers for personal use
  • 67 minorities (Black, Hispanic, American Indian)
model
Model
  • Estimation Equation:
    • D = discount
    • i = individual
    • j = model
    • t = time
    • H = household characteristics (vector)
    • Z = model characteristics (vector of dummies)
    • X = time dummies
    • ε = iid error term
discounts
Discounts

List = base + options + destination fees + dealer prep fees

+ dealer specific costs

Transaction = (Expenditure – Expenses) / Sales Tax

+ Trade-in value

  • Absolute (not relative) – profit, not power
measurement error
Measurement Error:

Measurement error of LHS vars

Variables: model info, smaller options, trade- in allowance, sales tax, financing, fees.

Solutions:

1. Imputation

2. Lack of correlation with RHS variables (so we still have consistent results)

3. Tests for above

Measurement error of RHS

Variable: Race, Gender of bargainer

Solution: Race correlated, Gender biased towards finding discrimination

regression results table 2
Regression Results (Table 2)
  • Dependent Variable = D
  • R-Square = .18, Obs = 1,279
  • Significant:
    • Intercept (-)
    • Rural (-)
    • Midwest (+)
    • dealer financing (+)
    • first time buyer (+)
    • trade-in (-)
    • Q3/4p (+), Q4s (-)
    • CLAO*Minority (-)
  • Not Significant:
    • minority (-)
    • female (-)
    • minority female (-)
    • Wealth controls (-)
take home from ces regression
Take-home from CES Regression
  • Conclusion from microdata is no price discrimination due to race or gender
  • Then why bargain?

1. Bargaining power relevant, just not predictable

2. There is variation in prices paid: optimal for seller to bargain

  • How to explain Ayres & Siegelman?
        • Minorities choose stores with systematically lower prices
        • Sample Selection Bias: Discriminated drop out of market
        • Second Moments: Wider spread of reservation prices for minorities
possibility 2 sample selection bias
Possibility 2: Sample Selection Bias
  • Discriminated household’s don’t purchase, or purchased used cars
  • Arguments against this explaining difference between two studies:
    • Ayres & Siegelman find same discrimination pattern in 20% of sample reaching agreement
    • Visiting dealership indicates willingness to pay approximately equal to retail price – you might visit another dealership, but you wouldn’t leave the market
    • Re-estimate model with Selection Equation (used, drop out)
      • Similar to OLS results
      • The correlation coefficient between the error terms of the selection and regression equations is statistically insignificant => “no selection bias” hypothesis unrejected
possibility 3 second moments
Possibility 3: Second Moments
  • Blacks’ distribution of reservation prices is spread out
  • Bargaining theory predicts sellers use whole distribution of buyer reservation prices in making offers
  • Example
    • Reservation prices: $4k, $6k (type A) v. $3k, $7k (B)
    • Initial offers higher of $6k and $7k (respectively; types costlessly observed)
    • Final offers depend on parameters, strategies, but likely that $3k will receive lower (using patience to bargain longer)
  • If blacks have higher spread of reservation prices, bargaining theory predicts:
    • First round offers to blacks higher
    • In equilibrium, low-value blacks receive lower final offers than low-value whites (and vice-versa)
    • For some parameters, groups pay same average prices
  • Econometric Evidence i-iii…
iii quantile regression
iii. Quantile Regression:
  • Dependent Variable = D
  • R-Square = .18, Obs = 1,279
summary of i iii
Summary of i - iii
  • Empirical discount distributions for minorities is more spread out than the distribution for white males
    • Explains initial offer disparity
  • What about final offer disparity?
    • Ayres & Siegelman “final offers” are poor indicators of transaction prices (since they do not lead to sales)
    • Ayres & Siegelman imposed uniform bargaining strategy. This indicates from where on the distribution you come
      • Systems analyst at a bank
      • Wealthy suburb of Chicago
summary
Summary
  • Ayres & Siegelman, Audit, price discrimination
  • Goldberg, microdata, no price discrimination
  • Reconciliation: Second moments
comments
Comments
  • CES Regression?
    • Signs were headed in right direction (increase N, increase R-square)
    • Especially few minorities
  • Story of wider spread in minority reservation prices?
    • Not income (controlled for)
    • Aggressive v. Unaggressive heterogeneity?
    • Aggressive v. Uninformed?
  • Link between reservation prices and discounts?
    • More careful treatment of bargaining theory