Race and Gender Discrimination in Bargaining for a New Car Ian Ayres and Peter Siegelman 1995 Presentation by Shing-Yi Wang

Idea Testing for discrimination in a consumer good market. –Negotiation allows sellers to treat buyers differently. Animus or statistical discrimination?

Background: Other Audits Employment –Newman (ILRR, 1978) –Neuman, Roy, and Van Nort (QJE, 1995) Housing Market –Yinger (AER, 1986) Taxis –Outtz et al. (1989)

Method: Audit Study Pairs of testers (one always a white male) were sent to Chicago-area dealerships –Bargained for the same model at the same dealership within a few days of each other 38 testers bargained for 306 cars (9 models) at 153 dealerships Randomize: choice of dealerships assignment of pairs to dealerships which tester in the pair goes first

Uniformity Attempt to eliminate all intertester variation except for race or gender –Age: years old. –Education: 3-4 years of postsecondary education. –Average attractiveness. –Similar “yuppie” clothing, drove in similar rented cars. –Trained to give uniform answers to questions they were likely to encounter. Key Question: Are any differences that are not controlled for correlated with race or gender?

Reduce “experimenter effects” (or “Hawthorne effect”) - Definition: unconscious desire to produce expected results in an experiment –Testers unaware that another tester would visit the same dealership –Testers unaware that the focus of study was discrimination Additional Controls

Testers’ Scripted Behavior First, testers got initial offer from dealer, then offered a price equal to an estimate of dealer’s marginal cost for the car. Then : two scripted bargaining strategies: –Split-the-difference: Tester responded to dealer offers by making counteroffers that averaged the dealer’s and the tester’s previous offers. –Fixed concession: Regardless of how much the seller conceded, each counteroffer by the tester increased his/her offer by 20% the difference between the sticker price and the tester’s previous offer. O t = O t *(SP-O t-1 ) Bargaining ends when: - dealer attempted to accept tester’s offer - dealer refused to bargain further

Summary Statistics: Mean Price Premium Over White Men Initial ProfitFinal ProfitConcession White Females (7 testers,53 obs) $108.60$ % Black Females (8 testers,60 obs) $318.00$ % Black Males (5 testers, 40 obs) $935.00$ % Note: White Males (18 testers, 153 obs) Concession: 44.6% Initial offer: $1000 above MC

Basic Econometric Model OLS: Π ai = X ai β+ ε ai FE: Π ai = X ai β+ μ a + ε ai Π ai : dealer profit on the ith test (i=1,2) in the ath audit (a=1,…153) X ai : matrix of dummies for tester race & gender μ a : constant unobservable, mean-zero, audit-specific error term Audit-specific fixed-effects regression –Exploits panel structure of data (2 obs for each of the 153 dealerships). –OLS (not including μ a ) will result in inefficient estimates if there are any factors unique to specific dealerships that are relevant.

Animus Higher prices paid by minorities and women compensate people with animus for having to associate them. 1.Owner Animus - Black testers did not get better prices at black-owned dealerships 2.Employee Animus - Dealers made hostile race- or gender-based statements about 4% of the time. - Salespeople spent about 13% longer negotiating with minority testers than with white males. - Seller interaction variables. 3.Customer Animus - Length of time. - Neighborhood Effects.

Statistical Discrimination Dealers use customer’s race or gender to make inferences about customer’s knowledge, search and bargaining costs and reservation price. 1.Search Costs -Minority tester 2.5 times more likely than white males to be asked how they got to the dealership. -Suburbs vs. city center. 2.Consumer Information - Consumer Federation of America: 61% of blacks versus 31% of whites believed car prices were not negotiable. - Dealers made an initial offer at sticker price to white males 9% of the time, and to others 29% of the time. 3.Bargaining Costs - Tastes for bargaining. - Procedural hurdles: minority testers were more often asked to put down a deposit, to sign purchase orders or to have their offers “bumped.”

Robustness Checks 1.Random Effects Model

Robustness Cont. 2. Individual Tester Effects Π ti = X ti β+ μ t + ε ti - Look at heterogeneity across individual testers rather than across dealerships. - Magnitude and significance of race and gender dummies remained the same.

Robustness Cont. 3.Attempted Acceptances vs. Refusals to Bargain Further -Include dummy and interactions in basic regressions. -Attempted acceptances  $400 lower profit -For white males, 25.6% of negotiations ended in acceptance. For other groups, 14.9% ended in acceptance.

Robustness Cont. 3.Nonparametric Tests for Race and Gender Effects

Conclusion This study finds evidence of discrimination in the new car market, but it is difficult to explain the source of discrimination. While there is some weak evidence of animus, they conclude that the ancillary evidence more strongly supports statistical discrimination.

Discussion How well does this experiment generalize into market outcomes? –Jake Strong evidence for discrimination, but need further work to understand the reasons for differentials in markups. Further research: –Look at Saturn (no negotiating on prices)