Race and Gender Discrimination in Negotiation For the Purchase of a New Car, 84
American Economic Review 304 (1995) (with Peter Siegelman).
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The purchase of a new car typically involves negotiations between buyer and
seller. Such negotiations may leave room for sellers to treat buyers differently on the
basis of race or gender, especially because any individual buyer has little or no means
of learning the prices paid by others. The tests we report in this paper confirm this
possibility; we find large and statistically significant differences in prices quoted to test
buyers of different races and genders. This is true even though the testers were
selected to resemble each other as closely as possible, were trained to bargain
uniformly, and followed a prespecified bargaining script.
Race or gender discrimination by sellers might be motivated by two broad kinds
of forces. The first is noneconomic tastes for discrimination (including traditional forms
of animus bigotry) introduced into the market by a firm's owner, employees, or
customers (Gary Becker, 1957). Even a market in which no participants are prejudices
might exhibit discrimination, however, if dealers use buyers' race or gender to make
statistical inferences about the expected profitability of selling to them. Our study finds
some evidence that is consistent with both broad theories of discrimination. Some
discrimination may be attributable to seller animus. But our data also suggest that at
least part of the observed disparate treatment of women and blacks is caused by
dealers' inferences about consumer reservation prices.
Statistical inferences might disadvantage black or women consumers even
though they are on average poorer than white males and should therefore have lower
(opportunity) costs of search (George Stigler, 1968). Differences in information and
(direct) search or negotiation costs might give white males lower reservation prices,
despite their greater ability to pay and higher opportunity costs of search time.
Moreover, profit-maximizing discrimination could well depend on more than a group's
mean reservation price (Steven Salop and Joseph Stiglitz, 1977). It may be profitable for
dealers to offer higher prices to a group of consumers who have a lower average
reservation price, if the variance of reservation prices within the group is sufficiently
large. Thus for example, suppose that a larger proportion of black (than white)
consumers are willing to pay a high markup, even the mean (or median) black customer
has a lower reservation price than her white counterpart. Knowing this, dealers might
rationally offer higher prices to all black consumers.
The rest of this paper proceeds in three sections. The first explains the audit
method used to generate our data and discusses econometric specification. Section II
;then analyzes the empirical evidence for the existence of race and gender
discrimination. Finally, Section III uses some ancillary data to explore the causes of the
disparate treatment we found. There is some support for both statistical and animus-
based theories of discrimination in the data.
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