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Still Horse Trading in the Internet Age

In a bargaining situation, knowledge is power. If one side knows that the other is “highly motivated,” then the price can be adjusted accordingly. Knowing the other party’s desires, concerns, and financial resources provides the bargainer an edge in deciding whether to accept a given offer or hold out for a better one. The one thing that neither side wants is for the other to know what their best offer will be. For the buyer, the purely financial elements in that calculus are based on personal factors like savings, income, ability to borrow, current debt, and current expenses. In car bargaining the buyers were always at a disadvantage, because the salesmen felt free to ask about any or all of these factors. Getting this data was part of the qualifying process that the sales staff used to determine which cars they might be able to sell this particular person, based on the prospect’s capacity to pay.

The customers, however, were in no position to ask the sellers about their financial condition and thereby determine how motivated they were to make a sale. Nor could the customers know about the dealers’ economic particulars, not the least of which would be what the dealers paid the manufacturers for the cars—the wholesale price. The Studebaker Company described their costs and dealer markups to the public in 1916, but their frankness was not followed up by others—or for that matter, even by themselves.1 As a rule, sellers do not tell buyers what their goods cost them or how much they are marking them up, although in some atypical instances, such as real estate and stock shares, that information is a matter of public record. Because prices were negotiable and car dealers were always claiming that they were selling for just a few dollars over wholesale, the dealers’ cost was a datum point that mattered to auto sales.

The Dealer’s Cost

No businesses had ever routinely published their wholesale prices, and automobile retailers were not about to break that pattern. From time to time individual dealers did offer to show their invoices to customers as part of a particular promotional campaign, but these attempts were either short-lived advertising gimmicks or met with concerted industry opposition.2 Just before the hearings that would lead to the Monroney Act, Ford dealer O. Z. Hall of Birmingham anticipated the law by displaying Photostats of his factory invoices along with posted prices that represented a low markup. Neither the factory nor his competitors were pleased by this breach of retail protocol, and they successfully pressured the firm to end its experiment in commercial transparency.3

Industry attempts to stop the public from knowing dealer costs were ultimately doomed to failure by the industry’s own history of negotiating prices. Before World War II, posted list prices for autos meant that most negotiation took place over trade-in allowances, thus maintaining the semblance of price normalcy for new cars. That changed between 1946 and 1959, when companies stopped posting list prices, and the entire industry pricing system (for both new and used cars) reverted to a preindustrial practice of price haggling. When the Monroney price stickers became standard, the postwar system of bargaining ensured that the sticker price would not be the selling price. Except in rare instances, the sticker became the ceiling not the floor in negotiations. The floor was what the car cost the dealer, and the most determined consumers wanted to bargain up from the bottom, not down from the top.

The easiest way to find out what the dealer had paid for a car was to ask to see the invoice, and there were customers who would do just that. There were also dealers willing to comply, and even more dealers who were willing to show customers what they claimed were the invoices but that were actually forgeries concocted to make the wholesale price appear higher.4 Even if the dealers were unwilling to show it, buyers were advised to ask to see the invoice, because the request would mark them as savvy shoppers.5 Asking to see the invoice took a lot more brass than most people had. In many cases they were asking for information that the dealer denied to the salesmen themselves out of fear that they would use the information to clinch sales at an unacceptably low price.6

Industry representatives were understandably annoyed at the growing assumption among consumers that they had a right to know what the car cost the dealer. “If I buy a suit, or my wife buys a dress, does the department store have to disclose what it paid for the garment so I can decide if I think the margin is fair or not?” asked Marc Stertz, the publisher of Automotive Executive.7 Stertz refrained from mentioning that neither he nor his wife expected to dicker over the price of their clothes as they presumably did when they bought their cars. Knowing the wholesale price of their clothes would have made no difference to what they paid. Knowing the wholesale price of their cars would have given them a real advantage when bargaining in the automotive marketplace.8

Consumers did not have to depend on the willingness of dealers to disclose their costs. By the early 1960s formulas were widely available that allowed buyers to approximate the wholesale price of new cars by working backward from the sticker.9 Third-party sources went the formulas one better by providing specific dealer wholesale prices for a fee. Car/Puter was the first such firm in 1972, but it found that pressure from auto advertisers forced many newspapers to reject ads for its price disclosures and its related broker services.10 Then, in 1983, Consumer Reports began offering a similar service, which it could do with impunity because the magazine did not accept any advertising.11 The jig was up. Salesmen had to assume that an increasing number of prospects would come armed with knowledge of the dealer’s cost. Consumer Reports was followed by other fee-based services, and then by print, and finally by Internet sources that would provide the information for free.12 The historical moment had arrived for the barefoot pilgrim to become a steel-shod warrior. The new-car market had been transformed from an opaque, almost preindustrial environment where prices were established on an ad hoc basis, to a market of limpid transparency where every customer could know exactly what the product cost the seller and offer to pay accordingly.

Few doubted that the Internet and its World Wide Web were a revolution; fewer were sure just what was being revolutionized. Information distribution, certainly, but to what end? In the field of auto retailing, observers thought, this new medium had the power to do what no other technological, social, or political force had done before it, and that was to change the way personal transportation was bought and sold. It was no longer necessary to pay nine dollars apiece to Consumer Reports for the wholesale price of each model a consumer might be interested in and wait for it to show up in the mail. Anybody could go on line and find out what the dealer paid—for free and immediately. Once that information became common knowledge, the reasoning went, the impossibly old-fashioned process of haggling over price would be so anachronistic that even the retail automobile industry would have to enter the late-nineteenth century (now that it was almost the twenty-first) and begin to post its prices and sell to all comers for the same amount. There would be no more dickering and bickering, no more greeters, qualifiers, and turn-overs to manager closers. The customer—man or woman, rookie or veteran, white or black—would know what the car cost the dealer as well as exactly what it would cost every customer and could order one on line to have it delivered directly to the house. It would be the automotive equivalent of the self-service supermarket checkout. Or more accurately, it would be the equivalent of buying a car from

The idea of a “robot” salesman had first appeared in 1954. Touted as “a machine that sells automobiles,” it was in fact a machine that got the customer’s name, telephone number, and car preference, thus generating a hot lead for a salesman to come calling.13 It was no more than a marketing gimmick in a gimmicky era. Similar gadgets appeared from time to time in the following three decades. Robot advocates boasted that they could do everything a salesman could do except give the customer a test drive and negotiate the price.14 Those were pretty significant exceptions from “everything,” and the admission that negotiating the price was something that had to be done before one could purchase a car was an unwarrantedly casual reference to the core anomaly of automobile retailing. (See fig. 6.)

The computer’s real potential for altering car sales lay in the possibility of finding the best deal online and then buying online without having to go mano a mano with a salesman. That possibility emerged in the mid-1990s with the creation of the World Wide Web and the availability of efficient Internet search engines to find things on it. At first, dealers perceived the Net as a catalog and an advertising medium, a more efficient version of the shopping mall robot gizmos.15 However, the Internet was already ahead of them. In the fall of 1995 reporter Ed Henry described how he bought a new Jeep without ever talking to a live person until he picked up the car. The process was clumsy and involved paying separate fees for some of the information, but he was able to research the cars, get feedback from reviewers and other owners, discover the dealers’ cost, find a dealer who had the model he wanted at a price he was willing to pay, and confirm an order with a deposit—all online.16 It was, said Harvard professor Jeffrey Rayport, the “disintermediation” of the industry—a B-school buzzword for the death of the salesman.17

For about five years, from 1995 to 2000, industry pundits and participants predicted the end of “auto retailing as we know it.” Some thought that meant dealers would start to offer fairer prices, haggle less, and emphasize “professional treatment of customers.”18 Others were more apocalyptic. In 1996, Fortune magazine predicted that because of computers, superstores, and brokers, “traditional car dealers—among the most hated business people in America” were about to be put “on the endangered species list.” J. D. Power III, the head of the eponymous consulting firm, concurred that car dealers would become as rare as travel agents and that those who survived the great shakeout “will be able to do business like normal merchants rather than like sharks fighting over the same piece of flesh.”19

No such change occurred. Instead, three previously established forms of car buying became a bit more clearly defined. First, untutored buyers who might not make more than the most perfunctory effort at negotiating would continue to be milked dry by predatory salesmen and the occasional saleswoman. They would be charged list price for the car and its factory-installed accessories. They would be sold a “pack” of unnecessary and over-priced dealer add-ons. They would get less for their trade-in than it was worth and pay more for financing their car with the dealer than they would have with an outside lender. They would be the classic “barefoot pilgrims,” disproportionately poor, black, or female, who would become trophies to be bragged about in the salesmen’s break-room. Second, knowledgeable buyers would come into the showroom armed with more information than they had ever had before, including the wholesale cost of the car and each of its accessories. However, all the forearming and forewarning would not change the fundamental process: they would still have to fight with the tag-team of sales staffers to get the best possible deal on the new car and the trade-in. Finally, there would be those who were knowledgeable but reluctant to commit the time and emotional energy necessary to bargain for the very best deal. They would use the Internet to find a good (if not the best) price and arrange all the particulars online, showing up only to hand over the check and drive off the car—and sometimes even that would be delivered to their door.20 But then, there was still the issue of what to do about their present car….

At first, dealers worried out loud that the manufacturers would revert to their old threat of setting up competing retail outlets, but now the outlets would be online and would not involve substantial investments in brick and mortar.21 Some factory executives may have dreamed about doing so, but manufacturers took no significant steps toward direct selling. Instead they used the Internet to set up advertising sites that directed customers to the traditional retail outlets.22

Buyers who used the Internet to check on prices became a major concern of dealers and salesmen in the late 1990s. The buyers showed up with printouts, some of which included the always mysterious “holdback,” the roughly 4 percent of the factory price that was rebated to the dealership at the end of the year. Although the holdback did not appear on the Monroney sticker, and was not factored into the salesmen’s compensation, it represented real profit for the dealer and actually allowed a car to be sold below invoice while still providing the dealer with a profit—albeit a thin one.23 These informed shoppers, noted a Washington State dealer, “don’t want a rapport with the salesman; all they care about is price, price, price. They want to get down to business, buy their car, and get out.”24 The number of sites that would provide the invoice prices proliferated in the late 1990s, and although many offered a referral service, most of the people who used them just wanted the price information so they could do their own bargaining.25 For a brief period the trend was so strong that the National Automobile Dealers Association joined the stampede by setting up its own Web site that contained all the requisite information—including the holdback, a service that did not sit well with its members and was soon dropped.26

By the year 2000, dealers were recognizing that they had to respond to the growth in Internet customers by setting up their own Web sites that would provide specific price information online.27 But whether the prospects got their numbers from a third-party site, NADA’s site, or the dealer’s own site, many still wanted to talk to a sales representative to consummate the deal. Customer John Hyater explained why he would not buy online in 1997: “It’s the thrill of the game. It’s a challenge, you know. Maybe it just goes back to all that old testosterone laden genes in the past, you know, going out and hunting for something and bagging it and bringing it home.”28 For customers like Hyater, a car was not bought—it was won.

The one relatively new wrinkle in the retail sales scene was the appearance of so-called “third party” sellers. On the one hand, these firms were nothing more than the latest version of brokers, who had functioned on the fringes of the auto market for generations. On the other, they were able to move from the periphery toward the center because they were easily accessible online and they provided a convenient way to get comparative price information. Information sites like Kelley Blue Book and Edmunds, which were Internet extensions of preexisting companies, experimented first by selling their data online, and then by giving it away free but earning money from online advertising. A company called Auto-By-Tel (later, however, evolved the form that would become the Internet model.

Autobytel was founded in 1995 by Peter Ellis, a failed California and Arizona car dealer. Ellis’s idea was to give auto customers as much information as they wanted for as many models as they wanted for free. Although it was part of the original cohort of Internet retailers (the generation), Autobytel could not duplicate Amazon’s business model because it had no way to acquire and deliver the product.29 Nevertheless, the firm generated the kind of extravagant predictions that accompanied so many Internet startups of that period. Ellis claimed that his company would do away with price haggling and poor service. It was going to lower dealer costs and transform sales staffers into salaried professionals instead of a cigarette-smoking lowlifes who would “mug the customer’s wallet” and “gull the customer into thinking they’re getting a great deal” on an overpriced car. Ellis, said one writer, was doing nothing less than “burning down the house.”30 Visitors to Autobytel who were interested in a car could fill out a form that would be forwarded to one of the 2,700 dealers who affiliated themselves with the firm. In a day or two, the customers would receive a specific no-haggle quote, and all they needed to do was go to the dealership to pay and drive home with their new car. To be listed on the Web site, the dealers paid Autobytel a sign-up fee, an annual fee, and monthly fees based on the number of brands they sold.31

For the buyer who knew that prices could be negotiated but did not like to negotiate, buying through a service like Autobytel seemed to make sense. For one thing, it allowed buyers to believe that they had gotten a good deal: “Usually when you leave the lot, you feel like the next guy who arrives is going to get a better price than you. This is the only time I’ve left the lot feeling good,” said a New York financial consultant. Through Autobytel he paid $4000 less than his local dealer, with whom he had a long-term personal relationship, had asked for.32 The system looked like it was working, and other firms jumped onto the bandwagon. By 2000 there were a dozen sites that acted as intermediaries for purchasing a car. Some merely put buyers in touch with sellers; some allowed the buyer to make a firm transaction online; and at least one, CarsDirect, would deliver the new car to the purchaser’s house.33

Like so many other retail concepts that faded with the end of the dot-com boom in 2000–2001, car-buying sites lost their fearsome aspect. Some retailers worked out arrangements with the third-party sites to supply their customers with cars. In theory, they could recoup the fees the Web sites charged by spending less on advertising and sales help, although the correlation was so indirect that nobody could pin down the costs one way or the other. Other dealers developed their own retail Web sites, often in collaboration with the manufacturers, which worked well enough to dampen worries about the end of automotive retail outlets.34 When Ford tried to centralize Internet pricing, in effect creating a national one-price policy for its cars, the dealers balked and the project died an early death.35 Dealers and customers may have said they did not like haggling, but when the time came to do the deed, both sides appear to have preferred face-to-face negotiation. Although the vast majority of buyers—estimates range up to 80 percent—do their preparatory information-gathering online, relatively few of them buy there. A car, it seems, continues to be a prize as well as a purchase.36

Many of the most prominent car-buying sites consolidated after 2000, and those that survived provided reluctant bargainers with a relatively painless way to get a pretty good deal on a car.37 Women in particular found the absence of adversarial bargaining on the Internet a more congenial way to buy, and several studies have shown that the Internet is a reasonable alternative for anybody who dislikes haggling.38 There was, however, no assurance that the dealers to which the online sites referred their customers would be the cheapest, or even cheap. In 2002, Consumer Reports found that buyers did better by aggressive face-to-face bargaining than they could do online, but the online services did get them better prices than either telephone negotiation or buying through a big-box discount store.39 Buyers might think they had gotten the same price as any other person, but if they wanted the best possible price they had to comparison shop among sites, and even that price could often be further negotiated with the dealer whose name came up.40

For both individuals and firms dealing in secondhand cars, the Internet provided an improved form of classified advertising, but aside from the immediacy of electronic information and the convenience of being able to post a picture along with the description, the transaction between the buyer and seller was no different than it had been in 1895 when men were swapping horses. Used-car buyers (and private sellers) could easily check the suggested wholesale and retail prices for their vehicles at Edmunds or Kelley Blue Book online, but that was simply a more efficient way to gather data they could have gleaned from the classified ad section of their local newspaper. Buyers could search on Web sites that featured used cars, some run by local newspapers who were losing advertising revenue to the Web and some by national firms like Autobytel or Microsoft’s CarPoint, but when it came time to buy, they had to show up to look the car over, give it a test drive, and dicker face-to-face in a way that would have been familiar to their great-great-grandfathers.41

Make Me an Offer!

The historical model established by horse trading provided an alternative that helped keep auto dealing from following the lead of other consumer retailing into a single-posted-price retail model. The horses ran roughshod through history, trampling all obstacles that threatened to alter their path. The bicycle craze of the 1890s challenged male dominance of personal transportation and its accompanying trading system, but it fizzled out before it could shift the paradigm. Electric cars never became popular enough to give women a firm footing in the new-car market, and when used cars became an issue after 1909, trade-ins resurrected the male tradition of transportation negotiation. Somewhere west of Laramie a flapper may have driven her car recklessly across the prairie in 1923, but the culture of the horseman racing by her side still dominated the car-sales system. The Depression only deepened the pattern of what was then called “wild trading,” and it took government intervention through the NRA to put on the brakes in 1933. Then it took the Supreme Court only two years to release them.

Intoxicated by the colossal demand after World War II, car buyers and sellers created their own gray market to circumvent manufacturers’ list prices. The shady retail practices of the postwar sellers’ market continued into the 1950s, entrenching ever more deeply the pattern of establishing the price of each sale through adversarial negotiation. Public outrage at some of the most aggressive dealer practices, and dealer outrage at some of the most aggressive manufacturer practices, led to federal intervention in the form of the Monroney Act with its requirement of a window sticker that listed the MSRP. Rather than changing the historically established pattern of price negotiation, the Monroney Act gave it a unique legislative basis. Alone among all consumer goods, automobiles had to carry their list price; and given the tradition of price negotiation, that became a point of negotiation, not a standard sales price. The women’s movement roiled the waters a bit, but the challenges of the single-price Saturn and of more women buying and selling cars were insufficient to alter selling patterns that had become so normative that it was easier to change the way women shopped, when they were shopping for cars, than it was to change the way cars were sold.

Just as the tradition of bargaining over the price of automobiles survived the challenge of the Internet, so did the standard one-price model for retailing all other manufactured products. Analysts regularly announced the imminent demise of the posted-price paradigm, but no serious change has taken place.42 Web sites like NexTag, Priceline, and eBay have all experimented with auction/ bidding approaches to selling, but none has altered the consumers’ preference for comparing posted prices and buying with the knowledge that they paid the same as every other person buying from the same source at the same time. Cars alone have withstood the pressure to conform to the single-price retailing norm. The pundits who predicted that the Internet would change the way retailers price both regular goods and automobiles have so far been wrong. The democratic, equalitarian, female model dominates everywhere in retail except on the showroom floor, which retains its masculine style even in the relatively rare instances when women are doing both the buying and selling.

The persistence of bargaining in automobile retail history can be attributed to a number of factors, none of which by itself would have been enough to keep the sale of new cars out of the single-price retail mainstream. Furthermore, almost all of the reasons for automotive exceptionalism could be addressed by the industry. Mechanically, cars remain very large and complex machines. Although the amount of dealer preparation that needs to be done has declined steadily since the days when some cars were shipped partially disassembled, automobiles still need to be given a pre-delivery going over by dealer employees. There is no reason, however, why this could not be done in regional preparation centers where the vehicles could also be stored until they were sold and prepped for delivery. Dealers like to emphasize that they are needed to provide warranty service for cars, but again, there is no reason why this could not be done by authorized factory service centers that did not double as retailers. The whole test-drive ritual could be handled by showroom demonstrators, which was the pattern throughout most of automotive history and which is what happens in any case when a car is special-ordered.

Neither the size nor the relative cost of a new car is an insurmountable obstacle to selling cars like other manufactured goods—at the same posted price to all customers. What was historically called “the used-car problem” does, however, inject an inherently unpredictable element into the transaction. But why should that transaction be subsumed into the sale of the new car? The manufacturers’ use of exclusive retail franchises allowed them to put pressure on their dealers to sell more units than the factory-established list price could generate. Dealers who cut MSRP to meet factory demands risked losing their franchises, but horse trading had established an alternative model. By swapping the old car plus a cash difference for the new car dealers preserved the illusion of a list price while continuing to do what men had always done. Haggling over the price of a car became part of the meaning of the car, just as it had been part of the meaning of owning a horse. To stop swapping and haggling would require that a large number of people agree to simultaneously give up a method of doing business that is deeply embedded in the culture of conventional automobile retailing. Such a system of car sales is not unimaginable; it is just unlikely. Nothing, not depression, war, car shortages and surpluses, or radically new retail technology has been able to bring it about.

What has been called path dependence is surely an apt description of the stickiness of the car-buying process. However, the stickiness does not arise from the continuation of some past technological decision but comes from the culturally constructed meaning of manhood and the things men ride. The path that car buyers take was an animal track before it was a superhighway. The peculiar folkways of horse trading, with its tradition of male contestation, survived the transition from horse to bicycle to car because it was the sociocultural path of least resistance. Horses, and then cars, were bought and controlled by men who viewed them as extensions of themselves and who incorporated that identification into the process of acquiring them. Even when women entered the picture, first as drivers then as buyers, their historically different style of buying was not enough to change the route. Men and women buyers still walk the path to the showroom floor where a sales staffer will eventually start the bargaining process by saying, “Make me an offer!”

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