Price Discrimination, Consumer Search, and Online Sales in the Automobile Industry

We investigate the welfare consequences of introducing an online distribution channel in the French car industry, where most sales take place in person at discounts off list prices. We estimate a model with unobserved third-degree price discrimination and sequential consumer search associated with visiting car dealers. For our counterfactual analysis, we develop a model of multi-channel sequential search and introduce an online distribution channel that charges list prices but entails lower search costs. The online channel increases competition and leads to lower list prices. For consumers more sensitive to prices than to search costs, firms still offer in-person discounts. For those more sensitive to search costs, firms raise in-person prices to steer them toward the online channel. The online channel leads to market expansion and is profitable for firms, with profitability rising with search cost reductions. However, the costs and benefits of the online channel are unevenly distributed among consumers, with older and wealthier consumers obtaining most of the benefits.