The Effect of Free Internet Advertising on the Pricing of Used Cars
Daniel A. Epstein
January 30, 2007
This paper examines the question of whether sellers of used automobiles mark up
the value of their product differently when advertising is free than when advertising is
costly.
The advent of the internet has produced a forum that allows sellers to advertise
to a large number of people for no monetary cost. Craigslist.org, dubbed “the world’s
biggest free bulletin board,” is an extremely popular website forum that does not charge
patrons to advertise. This new method of advertising may have an influence on the
pricing of the goods advertised, and incentives may be different in the world of free
advertising. This paper intends to compare the prices and values of similar goods when
advertising is free and when advertising is costly to see if there is any difference in
markup percentage. This research is of interest as it examines the impact of the internet
on pricing policies and sheds light on the role of information’s affect on market
dynamics.
Literature:
No research has attempted to answer whether similar goods are priced differently
dependant upon whether they have been advertised freely or at cost. There is, however,
literature on the effect of advertising on prices, on price as a signal of quality, on the role
of information gatekeepers on the internet in competitive markets, on auction theory, and
on the role of information dispersal on prices; all of which are relevant to my research.
Benham concluded in his article, “The Effect of Advertising on the Price of
Eyeglasses,” that advertising does influence pricing, and when advertising was allowed in
the case examined, lower prices followed. He concludes that consumer’s knowledge of
market information was more important than previously thought, and that the role of
advertising cost was less important than previously thoug