Automobile Prices in Market Equilibrium with Unobserved Price Discrimination

In markets where sellers are able to price discriminate, or the buyers to bargain, individuals receive discounts over the posted prices that are usually not observed by the econometrician. This paper considers the structural estimation of a demand and supply model à la Berry et al. (1995) when only posted prices are observed. We consider that heterogeneous discounts occur due to price discrimination by firms on observable characteristics of consumers. Within this framework, identification is achieved by assuming that the marginal costs of producing and selling the goods do not depend on the characteristics of the buyers. We also require a condition relating the posted prices to the prices actually paid. For instance, we can assume that at least one group of individuals pays the posted prices. Under these two conditions, the demand and supply parameters, as well as the exact discounts corresponding to each type of consumers, can be identified. We apply our methodology to estimate the demand and supply in the new automobile market in France. Results suggest that discounting arising from price discrimination is important. The average discount is estimated to be 10.5%, with large variation depending on the buyers’ characteristics and cars’ specifications. Our results are in line with discounts generally observed in European and American automobile markets.