The Joy of
Economics: Making Sense out of Life
Robert J. Stonebraker, Winthrop University
Automobiles: Different People, Different Prices
You can't find a better deal!
…..local automobile dealership ad
My friend Laurie is a shopper supreme. She refuses to pay full price. In the local mall she ignores any rack or counter not bedecked with a sign crying: Final Clearance: 75% Off. She combs through thrift shops, yard sales and factory closeouts. She bargains with clerks and managers. And it works. She finds unimaginable bargains: a $250 dress marked down to $8 because of a ripped seam she can mend in five minutes, a $75 pair of shoes for $3.50. She loves the chase; she loves the challenge. The mere mention of a shopping trip can make her nostrils flare like a thoroughbred being led into the starting gate.
She loves to shop. She lives to shop. But not for cars. Dragging her into a car dealership is like dragging her in for a root canal. She demands Novocain for both.
It was not always so. Some years ago, with her Volkswagen Rabbit mired in terminal decay, she plunged eagerly into the hunt for a replacement. She did all the right things. She studied consumer guides. She prowled area dealerships and talked to current owners. She quizzed mechanics about reliability. She took test drives in a variety of models. And, after an exhaustive search, she made her choice. A Nissan Altima. A red Nissan Altima. Only one step left: close the deal.
Disaster. The sales staff would not budge on price. She cajoled. She threatened. She begged. She tried other dealers. No soap. Defeated and deflated, she quit.
A few days later, after a mournful recitation of her trials, a friend -- a young, male friend -- offered his assistance. He offered to negotiate a better deal. A better deal? Impossible. Laurie’s retail record was unblemished. Surely this young man could do no better. But he could. And he did. Within a week he had negotiated a deal that saved Laurie over $1,000.
How did he do it? How could he extract concessions that eluded such a shopping maestro as Laurie? Simple. He was offered a better deal because he was a male. Women and minorities face discrimination in the labor market. Often they fare no better as consumers.
Economists Ian Ayres and Peter Siegelman trained nineteen pairs of test buyers for automobiles who were closely matched in terms of age, education, and attractiveness. The test buyers dressed in similar yuppie-style attire and drove similar cars into the dealerships. They worked from identical bargaining scripts and gave comparable answers to questions about their professions and address. The members of a pair differed only with respect to sex and/or race.
Pair members bargained independently for the same model car in the same dealership, usually within three days of each other. The test buyers negotiated prices for over 300 cars at more than 150 dealerships in the Chicago area.
The results were striking. Both initial and final offers supplied to females and/or African-Americans were significantly higher than those given to their white male counterparts. African-American males fared the worst. They were socked with prices some $1,000 greater than those quoted their white counterparts. The actual differentials are listed in Table I.
Average Price Differentials
(Prices in excess of those offered to white males)
Buying Group Initial Offer Final Offer
White females $109 $ 92
African-American females 318 246
African-American males 935 1,101
All females and non-whites 407 481
Why? Are the owners bigoted? Do dealership owners push their salespeople to discriminate? Or is the salespeople themselves? Car salesmen have never ranked among the most respected American professionals. They are the butt of almost as many scurrilous jokes as are economists. Is racial and/or gender discrimination another layer of ooze on their already slimy image?
Perhaps. But if owner and/or salesman bigotry were the cause, women and non-whites should be treated most poorly in dealerships owned and operated by white males. They are not. African-American buyers were charged the same price differentials by African-American dealers as they were by white dealers. Female customers were treated just as poorly by female salespeople as they were by male salespeople. Neither the race nor the gender of dealers and/or salespeople seemed to matter.
Ayres and Siegelman conclude that statistical discrimination is the real culprit. Blatant bigotry is not the cause. Rather, dealers and salespeople use race and gender to make statistical inferences about the consumer's sensitivity to price -- what economists term price elasticity.2
Firms often employ price discrimination. They try to segment their markets and charge different prices to customers with different demand elasticities. The theory is simple. Identify those customers with highly-elastic demands (they're the ones who are very sensitive to price and will be driven into the arms of your competitors by high prices), and cut prices. Next, identify customers with less-elastic demands (they're the ones who are insensitive to price and are likely to buy anyway), and drive the price to them up. In other words, charge $40 for a new tire in your shop, but charge $60 for the same tire to the motorist stranded on the highway.
Such discrimination is fairly common. Discounts for children and/or senior citizens and special introductory rates for new magazine subscribers are more benign examples. But segmenting the market is not easy. Safeway cannot easily identify which customers will acquiesce to a higher price for broccoli; nor can K-Mart easily detect which customers have an inelastic demand for batteries.
Car dealers practice haggle-every-time discrimination. They try to guess the maximum price each individual customer is willing to pay, and charge accordingly. They ask strategic questions about occupation, address, family, and what other dealerships shoppers have visited. All are designed to help predict what a consumer might be willing to pay.
Consumers play the same game. They hide information and deliberately mislead dealers. You may recall an old Cosby Show television episode in which Dr. Huxtable, trying to hide his true income, dons his rattiest clothes before entering the auto showroom. But it's tough to hide your race or gender, and car salespeople regularly use racial and gender stereotypes to infer demand elasticities.
While dealers and/or salespeople may know little or nothing about a particular customer, they know quite a bit about statistical differences among races and genders. They know that women and African-Americans typically enter the showroom with less information and less proclivity to bargain. Although white males often salivate at the chance to lock horns with car dealers in a bargaining struggle, females and African-Americans may be unaware that bargaining is even possible. Ayres and Siegelman cite a Consumer Federation of America survey that discovered that many female respondents, and more than one-half of African-American respondents, believed that sticker prices were non-negotiable.3
Armed with such knowledge, salespeople will rationally adopt a more stubborn stance while bargaining with female and African-American customers. Their stern posture may not be the result of bigotry, but the results are the same. Women and non-whites pay more.
1. Ayres, Ian and Siegelman, Peter, "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, volume 85, number 3, June 1995, p. 304 (18).
2. Price elasticity measures how sensitive consumer demands are to changes in price. Specifically, it measures the percentage change in quantity demanded for a given percentage change in price. When consumers are very "price-sensitive," demand is highly elastic: a small percentage change in price will unleash a large percentage change in the quantity demanded. If price is only a minor concern to consumers, a price change will cause only a small percentage change in sales and demand is less elastic.
3. Ayres and Siegelman, op.cit.
To test your understanding of the concepts in this reading, try answering the following:
1. Explain the economic logic of why women and minorities are often charged higher prices for new cars than are white males.
2. What strategies might someone adopt to get a car dealer to offer a lower price?.
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