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Internet and the Efficiency of Decentralized Markets: Evidence from Automobiles

  • Author(s): Rapson, David
  • et al.
Abstract

We estimate the causal effect of Internet on volume of trade in a major distributed marketplace. From 1997 to 2007, a period during which residential Internet use tripled, Internet increased the volume of used cars traded in California by 7.2 percent. This implies a substantial welfare gain due to reductions in market frictions of approximately $43 million per year relative to 1997 Internet penetration levels. These gains are likely attributable to search and matching cost reductions and increased symmetry of information availability across buyers and sellers. Intriguingly, the effect is stronger in thick markets and urban areas, implying that Internet may help to diminish choice overload. Our results suggest that policies promoting broadband Internet deployment may enhance efficiency.

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