Further evidence of discrimination in new car negotiations and estimates of its cause.

• Date: 01 October 1995
• Author: Ayres, Ian

INTRODUCTION

A 1991 test of new car dealerships in Chicago indicated that dealerships offered significantly lower prices to white male testers than to similarly situated black and-or female testers: white female testers were asked to pay 40% higher markups than white male testers; black male testers were asked to pay more than twice the markup of white male testers; and black female testers were asked to pay more than three times the markup of white male testers.(1) This article extends the results of this initial test by presenting not only more authoritative evidence of discrimination but also a new quantitative method of identifying the causes of discrimination.

Although the results of the original study were based on 165 negotiations, the original article emphasized that:

[t]he most significant methodological weakness concerns the number

of testers per tester type .... Only six testers were hired: one white

female, one black female, one black male, and three white males.

Thus, for example, the results demonstrating discrimination against

black females are based on tests conducted by an individual black female

(paired with one of three white males).(2) This article presents the results of an expanded audit study that corrects for this weakness. In the expanded audits, 38 testers, including 5 black males, 7 black females, and 8 white females, negotiated for over 400 automobiles. The results are more authoritative than the prior test because there is a larger sample size and more testers in each race-gender category, and because the tests were conducted with enhanced controls to ensure further that testers were similar except for their race and gender.

The results of the expanded audit confirm the previous finding that dealers systematically offer lower prices to white males than to other tester types. But the more comprehensive data reveal a different ordering of discrimination than in the prior study: as in the original study, dealers offered all black testers significantly higher prices than white males, but unlike the original study, the black male testers were charged higher prices than the black female testers.(3) This article examines whether this different gender ordering of discrimination for black testers provides insights about the causes of discrimination(4) or whether it suggests weaknesses in the audit design.(5)

This article also uses a game-theoretic analysis of sellers' negotiation strategy to infer the causes of the sellers' demonstrated race and gender discrimination. At first blush, it seems difficult to use evidence of higher offers to distinguish between different possible causes of discrimination: for example, because either animus or statistical inference might cause a dealer to make a higher offer, it would seem impossible to infer from a higher offer whether the dealer was motivated by hatred or profits. This reasoning holds true if the dealer only makes a single offer to each buyer. It is possible, however, to infer more about the causes of discrimination when the dealer makes multiple offers. The dealer's choice of an initial offer, the size of concessions, and the speed of concessions will vary if the discrimination has different causes. For example, sellers might offer a higher initial price to black customers either if they believe that the black consumers are averse to bargaining or if the sellers have a particular desire to disadvantage black consumers.(6) But game theory suggests that these two causes of discrimination will give rise to different concession rates: in particular, a desire to disadvantage blacks would cause sellers to hold out longer for a high price, implying a lower concession rate than if sellers offer high initial prices because they believe black consumers are averse to bargaining.(7) Our evidence of the dealers' initial offers and willingness to make concessions can thus be used to distinguish among different causal theories.

Game-theoretic analysis of bargaining predicts that a seller's strategy will be a function of the seller's beliefs about certain variables, including the buyer's reservation price(8) and the buyer's and seller's costs of bargaining. Although these variables in theory determine the buyer's and seller's negotiation strategies,(9) to date no one has estimated the actual effect of these variables in real world negotiations.(10) This article provides a first attempt at deriving numerical estimates of these structural parameters.(11) Evidence about the sellers' initial offers, final offers, and the lengths of the negotiation is used to estimate crudely the sellers' beliefs about buyers' reservation prices, the buyers' costs of bargaining, and the sellers' costs of bargaining.

This process is repeated to estimate the sellers' beliefs with regard to each race-gender tester type. The article uses the evidence about sellers' beliefs to distinguish among four different causal theories of discrimination:

(1) Sellers may have higher costs per period negotiating with certain

buyer types -- "associational animus";

(2) Sellers may desire to disadvantage certain buyer types -- "consequential

animus";

(3) Certain buyer types may have higher per-period negotiating costs

-- "cost-based statistical discrimination";(12) and

(4) Certain buyer types may have higher reservation prices -- revenue-based

statistical discrimination."

Estimating the sellers' beliefs about different buyer types can thus "nest" these four causal tests of discrimination in a single parameterization that lets the sellers' own conduct reveal their motives.(13)

The estimates of the buyers' and sellers' cost of bargaining and of the buyers' reservation price are based on a number of extreme assumptions that are not only literally false but probably fail to capture important parts of reality. The estimates are at best a heuristic exercise to guide us imperfectly toward determining the causes of discrimination. But given that virtually no other quantitative evidence about the causes of discrimination in this or any other market exists(14) and given the usefulness of estimating the basic determinants of negotiation strategies, these estimates of the sellers' beliefs may shed some additional light on a relatively dark comer of the civil rights landscape.

With these important caveats, this parameterization of the bargaining game suggests three primary conclusions:

* Sellers discriminate against different buyer types for different reasons. Cost-based inferences may explain part of sellers' discrimination against black females while consequential animus may explain part of sellers' discrimination against black males;

* The sellers' bargaining behavior is inconsistent with associational animus but supports -- especially regarding black males -- consequential animus as a partial cause of the sellers' discrimination; and

* The sellers' bargaining behavior is broadly consistent with revenue-based statistical inferences as a partial cause of the sellers' discrimination.

These conclusions are also generally consistent with ancillary evidence about the causes of discrimination. As suggested in the original study, revenue-based discrimination explains at least part of sellers' behavior.(15) The game-theoretic parameterization, with all its limitations, however, suggests a less monolithic explanation.

The first Part describes the design of the expanded audit study and reports the evidence of race and gender discrimination. Part II then uses the game-theoretic analysis to distinguish potential causes of the discrimination. The conclusion steps back from the specific evidence of discrimination and its several causes to consider legal remedies and suggests that the types of discrimination uncovered in these audits could be reduced by encouraging dealers to switch to no-haggle sales and that enhanced consumer protection laws might be successful in nudging the market toward a no-haggle equilibrium.

1. ESTIMATING THE EXTENT OF DISCRIMINATION

   1. Describing the Audit Design

      The auditing method used to produce the data in this study largely paralleled the method used in the original study.(16) The testers were trained to follow a uniform bargaining script, and then sent individually to negotiate the purchase of a new automobile at randomly selected Chicago-area dealerships. Two testers -- one of whom was a white male -- separately visited each dealership. Thirty-eight testers bargained for approximately 400 cars comprising 9 car models(17) at 242 dealerships.(18)

      Dealerships were selected randomly, testers were assigned to dealerships randomly, and the choice of which tester in the pair would first enter the dealership was made randomly. In most cases, the two testers visited the dealership within a few days of each other. Great pains were taken to assure that the testers projected a standardized appearance.(19) The expanded audits also used two additional procedures to insure uniformity among the testers.(20) First, the testers drove to the dealerships in similar used rental cars of the same model and year. Using similar modes of transportation prevented the dealers from making inferences about the kind of car the tester drove or the way the tester reached the dealership.(21) Second, unlike the original audits, the testers were not aware that the research was intended to test for race and gender discrimination.(22)

      The testers followed a uniform bargaining script designed to frame the bargaining in purely distributional terms. The script instructed the testers to focus quickly on a particular car(23) and to ten the dealers that they could provide their own financing for the car. At the beginning of the bargaining, testers waited for an offer from the dealer or, after five minutes, elicited a dealer offer. Once the dealer made an initial offer, the tester waited five minutes and responded with a counteroffer equal to our estimate of the dealer's marginal cost for the car.(24)

      If the salesperson...