Department of Economics

University of Delaware

Working Paper #2007-03

Bargaining and Fixed Price Offers: How Online Intermediaries are Changing New Car Transactions

Michael A. Arnold and Thierry Pénard

ABSTRACT

        The Internet has introduced a variety of online buying services that expand the reach of sellers and reduce search costs for buyers.  In markets in which traditional outlets establish prices through bargaining, these online intermediaries have also altered the price setting process.  Perhaps the most well known example is Autobytel.com which provides referral services in the automobile market.  By using Autobytel, a buyer can obtain a non-negotiable price offer as an alternative to bargaining with a car dealership.  To understand the effect of online referral systems on the price setting process, we construct a theoretical model of oligopolistic price competition in which one dealership has an exclusive contract with a referral intermediary.  We derive market conditions under which the fixed price offered through the referral system will or will not be lower than offline (bargained) prices.  Our model provides theoretical insights relevant to results in the empirical literature addressing the role that Autobytel and other infomediaries play in online markets.

JEL Classification: D4, D83, L19, L89

Keywords: online markets, E-commerce, intermediary, autobytel, pricing