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![Page 1: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/1.jpg)
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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
![Page 2: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/2.jpg)
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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
![Page 3: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/3.jpg)
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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)
![Page 4: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/4.jpg)
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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
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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)
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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
ijttjtitijt XD ZH
![Page 7: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/7.jpg)
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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
ii
jij
djjkj
k
kjj
ijjij
TRDS
EXiEXPTij
CDPFDFPOOLBL
TLD
)(
*
![Page 9: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/9.jpg)
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Measurement Error:Measurement error of LHS vars
Variables: model info, smaller options, trade-in allowance, sales tax, financing, fees.
Solutions:1. Imputation2. Lack of correlation with RHS variables (so we still have
consistent results)3. Tests for above
Measurement error of RHSVariable: Race, Gender of bargainerSolution: Race correlated, Gender biased towards
finding discrimination
![Page 10: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/10.jpg)
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Regression Results (Table 2)
• Significant:– Intercept (-)– Rural (-)– Midwest (+)– dealer financing (+)– first time buyer (+)– trade-in (-)– Q3/4p (+), Q4s (-)– CLAO*Minority (-)
• Not Significant:– minority (-)– female (-)– minority female (-)
– Wealth controls (-)
• Dependent Variable = D• R-Square = .18, Obs = 1,279
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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 predictable2. There is variation in prices paid: optimal for seller to bargain
• How to explain Ayres & Siegelman?1. Minorities choose stores with systematically lower prices2. Sample Selection Bias: Discriminated drop out of market3. Second Moments: Wider spread of reservation prices for
minorities
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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
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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:1. First round offers to blacks higher2. In equilibrium, low-value blacks receive lower final offers than
low-value whites (and vice-versa)3. For some parameters, groups pay same average prices
• Econometric Evidence i-iii…
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i. Variances in Discounts Paid
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ii. Empirical Discount Distributions
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![Page 18: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/18.jpg)
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iii. Quantile Regression:
• Dependent Variable = D• R-Square = .18, Obs = 1,279
OLS Median 10% Quant 90% Quant
Minority -248
(-1.04)
-49
(-.27)
-784
(-2.87)**
453
(1.81)*
Female -130
(1-.10)
-115
(-1.39)
190
(1.52)
1
(.08)
MinFem -22
(-.05)
-98
(-.34)
446
(1.06)
-380
(-.86)
![Page 19: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/19.jpg)
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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
![Page 20: 1 Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey Pinelopi Goldberg (JPE, 1996) Presented by Jake Gramlich.](https://reader036.fdocuments.in/reader036/viewer/2022062407/56649dd95503460f94ace3dc/html5/thumbnails/20.jpg)
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Summary
• Ayres & Siegelman, Audit, price discrimination
• Goldberg, microdata, no price discrimination
• Reconciliation: Second moments
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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