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

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We investigate the welfare consequences of introducing an online distribution channel in the French car industry, where most sales take place in person relying on rebates over the posted prices to price discriminate. We estimate a structural model of demand with unobserved third-degree price discrimination and sequential consumer search related to visiting car dealers. In counterfactuals, we introduce an online distribution channel in which prices are uniform and consumers benefit from lower search costs. When both distribution channels are available, firms charge low online prices to attract internet-savvy consumers online, while continuing to price discriminate the less internet-savvy consumers in person. The online channel is profitable for firms, and the more it reduces search costs, the more profitable it is. However, the costs and benefits of the online channel are unevenly distributed among consumers, with older, wealthier, and internet-savvy consumers obtaining most of the benefits.