Reference no: EM132086438

Do Black men and women and White women pay more for cars? Many newspaper articles and hidden television investigations have suggested that they do. What does sound empirical research suggest? Ian Ayes and Peter Siegelman’s study published in The American Economic Review, ‘’ Race and Gender discrimination in Bargaining for a New Car ‘’ provides empirical evidence that indeed blacks and white women are charged more for new cars than white men are. Three hundred testers who were matched in terms of age, educational level, attire, and attractiveness and who were trained to negotiate similar went to Chicago-area car dealerships ostensibly to buy a car. White male, White female, Black male and Black female testers used the identical bargaining strategies after having received two days of formal training, in which they memorized the bargaining script and participated in negotiation role plays. To avoid bias, the testers were told only that the study involved how sellers negotiate for cars and did not know that other tester would also visit the same dealership. Finding strongly support race bias in initial pricing and negotiations. Initial offers to White male testers were about $1,000 over dealer costs. Initial offers to black males were over $900 greater than those made to white males. Initial offer to black women and and white women were $320 AND $110 respectively, over initial offers to white men. Differences between initial offers to black men and women and white men were significant an the 0.05 level: however, differences between white women and white men were not statistically significant. For all testers prices were lowered during negotiations, but dealer concessions exacerbated the advantages already present in the offer to white males. When these concessions were factored in, a stronger pattern of discriminations was apparent in the final offers when compared with the initial offers. Specifically, Black men, Black women and white women were offered final prices of $1,100 , $410 and $92, respectively, more than white men. Ayres and Siegelman point out that although black men were quoted the highest initial offer, they received the lowest average concessions. Il all, testers’ race and sex were strongly related to both the initial offer and the final price offered. Perhaps, most disturbing in almost 44% of cases, the initial offers made to white men were lower than the final offers made to other testers. It is impossible to unequivocally explain these results. Some suggest that sellers may expect white men to be more serious, sophisticated customers and non whites and white women to be less savvy customers. Others suggest that dealers may believe the latter groups are willing to pay higher markups than white men. Regardless of the theoretical explanations for the disparate treatment, the bottom line is the financial cost to black customers.

QUESTIONS:

1. If the results of a study, with dealers names and identification were to be released to the public, what would the likely outcome be for those dealers? how might competing dealerships capitalize on such disclosure?

2. What can individual dealers do to avoid customer discrimination, given the need to maximize profit? Is a profit maximization strategy consistent with discriminatory dealer behavior in the long term?