Consumer search in the U.S. auto industry: The role of dealership visits

Abstract

In many markets, consumers visit stores and physically inspect products before making purchase decisions. We view the inspection of a product at a retail location as a search for product fit. We quantify the cost and benefit from searching for product fit using a discrete choice model of demand with optimal sequential search. In these models, the benefit of searching is measured by the standard deviation of the product fit and has, heretofore, been fixed to one in estimation. We show that, with an exogenous search cost shifter, both the cost and benefit of searching can be separately estimated. Our empirical setting is the U.S. automotive market. We assemble a unique data set containing individual-level smartphone geolocation data that inform us about dealership visits. We also obtain information on new vehicle purchases from proprietary DMV registration data. Our exogenous cost shifter is the distance a consumer must travel to visit a dealership. Our results show that the benefit provided by dealerships to consumers is substantial. Within our empirical context, failure to estimate the standard deviation of the product fit leads to biased search cost and consumer surplus estimates and to inaccurate predictions regarding consumers’ number of searches and effects of at-home test drive programs.