How the Internet Lowers Prices

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The article "How the Internet Lowers Prices: Evidence from Matched Survey and Auto Transaction Data" by Zettelmeyer, Scott Morton and Silva-Risso (2005) is intended to the issues why, how and in what extent Internet helps consumers to reduce retail prices in such established industry as auto retailing.


(Zettelmeyer, Scott Morton and Silva-Risso, 2005, p.2)
The question posed by the authors is how using the Internet lowers retail car prices. A number of activities are involved in process of car purchase: information search, dealer selection, price negotiation and others. The authors investigate in what extent use of Internet in these activities helps consumers to reduce car retail price.
Research is made based on transaction data on 1,500 car purchases in California and responses to a survey which asked buyers detailed questions about their Internet usage, their attitudes towards information search and bargaining, and their demographics. (Zettelmeyer, Scott Morton and Silva-Risso, 2005, p.3) Authors use direct measures of search behavior and consumer characteristics; car price, or Price, is dependent variable. Standard hedonic regression of Price's logarithm is used for modeling:
where the X matrix is composed of car and transaction variables: car model, month, and region fixed effects, car costs, and controls for time of purchase and whether the car was traded in. The D matrix contains demographic and census characteristics of buyers: gender, age, education, income, race, house ownership, median house value and type of occupation. The S matrix contains survey responses that indicate the search behavior and Internet use of a buyer. ...
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