Price Discrimination and Online Sales in the Automobile Industry

We investigate the welfare consequences of introducing an online distribution channel in the French car market, where most of the sales are currently through car dealers relying on price discrimination. We estimate a structural model of demand with unobserved third-degree price discrimination and transportation costs related to visiting car dealers. In a series of counterfactuals, we introduce an online distribution channel in which prices are uniform and consumers benefit from lower transportation costs. When both sales channels are simultaneously available, competition from the online channel reduces the extent of price discrimination in the in-person channel. Introducing the online distribution channel leads to higher profits, and an increase in aggregate consumer surplus. Despite aggregate surplus gains, the costs and benefits of the online channel are unevenly distributed among consumers, with the less internet-savvy consumers bearing more of the costs and obtaining fewer of the benefits.