§6.

9 RACIAL DISCRIMINATION IN THE MARKETPLACE: A FOCUS ON CAR

SALES AND THE HOUSING MARKET

§6.9.1 Retail Car Sales

Even seasoned civil rights veterans have been profoundly disturbed by the discovery

that white males seeking to purchase a car receive significantly better prices than do

blacks. Even before the enactment of the civil rights protections in the 1960s, most blacks

assumed that whatever their vulnerability to racial prejudice when they sought a job, a

place to live, or a service in a facility open to the public, they could at least purchase a car

without the burden of color either barring them at the door or disadvantaging them in the

bargaining process. This assumption was likely always naive, but Professor Ian Ayres’s

Chicago-based research destroys it entirely.1 In his groundbreaking research, he has

demonstrated that retail car dealerships systematically offered substantially better prices

to whites than they did to blacks.

Professor Ayres’s original study found that automobile retailers react differently to

black than to white testers of both genders who utilize a uniform negotiation strategy. A

second, broader audit confirms the pricing discrimination, but the ordering is changed.

While in the initial study the final offers to black females were $500 higher than to black

males, the later study indicates that black males received offers that were $686 higher

than those made to black females. In addition, the disparate treatment of white females is

less significant: The first study suggested that white females received a final offer 40

percent higher than the one made to white males; in the second study, this difference was

1
Ian Ayres, Further Evidence of Discrimination in New Car Negotiations and Estimates of Its Cause, 94
Mich. L. Rev. 109 (1995); Ian Ayres, Fair Driving: Gender and Race Discrimination in Retail Car
Negotiations, 104 Harv. L. Rev. 817 (1991).
a statistically insignificant 2 percent. Because of the limited scope of the first study, it is

difficult to determine whether variations in the results of the two studies were caused by

Ayres’s method or by changes in the car dealers’ bargaining strategies. The second study,

however, may be considered authoritative. It involved 38 testers, including 5 black males,

7 black females, and 8 white females, who negotiated for more than 400 automobiles at

242 dealerships. The testers entered new car dealerships separately and bargained to buy

a new car, using a uniform negotiation strategy (detailing script, language, dress, and

responses). Testers even arrived in similar rented cars. After the initial offer, testers

followed a uniform bargaining script, using either a “split-the-difference” strategy or a

“fixed concession” strategy.

Professor Ayres analyzes several possible causes of discrimination within the

parameters of game theory. He concludes that the evidence supports several possible

explanations for price discrimination.

A. Animus-Based Theories

Sellers may have higher costs of bargaining with a disfavored group, or they may

wish to disadvantage a disfavored group. The results of Ayres’s second study do not

provide strong support for the theory that racial animus causes the disparate treatment of

black buyers. Contrary to what one might expect2, the race of the salesperson, dealership

owner, and the other customers had no effect on the treatment received by the black and

2
John Yinger, for example, concludes that in the housing market discrimination against blacks is motivated
by realtors’ perceptions that other renters or house buyers dislike having a black neighbor. See John Yinger,
Measuring Racial Discrimination with Fair Housing Audits: Caught in the Act?, 76 Am. Econ. Rev. 881
(1986).
white test buyers. The one exception was that black women received worse treatment

from black salesmen.

B. Statistical Discrimination Theories

Stemming from a seller’s desire to maximize profits, discrimination occurs because of

rational statistical inferences about average types of customers among different groups.

Sellers may believe that a disfavored group has higher costs of bargaining or higher

reservation prices. By charging high-risk groups a higher mark-up, the dealership seeks to

cover its default risk with a higher average profit per customer.

Salespersons seem to exercise statistical discrimination when they “qualify the

buyer,” that is, estimate how much the buyer is willing or able to pay. This is done by

direct observation and through the answers to questions about the customer’s experiences

with other dealerships and other cars. Sellers may perceive that race and gender affect

buyers’ costs of searching for a car and for information about the car market.

Studies find many of these statistical inferences irrational and based on erroneous

stereotypes. But if market experience does not teach sellers that their preconceptions are

false, disparate treatment that is inequitable and inefficient will persist. The uniformity of

discrimination in different neighborhoods suggests that salespeople may bring many of

their racial conceptions to the job and that these beliefs are not learned through their

bargaining experiences. Ayres suggests that dealers’ behavior is motivated largely by

informational disparities among different groups. Manufacturers also prefer a sales

process that allows their dealers to get the most money from consumers.

§6.9.2 Discrimination Lawsuits Pressure Car Industry

 Six African Americans filed a lawsuit alleging discriminatory treatment when they

were denied credit entirely when they shopped for cars at two dealerships in Chicago and

Midlothian, Illinois. One executive used a racial slur to drive away one potential

customer. Additionally, 70 cars purchased from the Chicago Marquette Chrysler Jeep

dealership were repossessed because of the race of the purchaser. Many of the customers,

according to the lawsuit, were not behind on payments. A boycott of the dealerships has

been threatened if management is not fired and such practices do not cease.3

Similar lawsuits have been filed against the financing arms of Toyota, Ford, General

Motors, and Nissan.4 A study accompanying one lawsuit looked at over 300,000 car loans

financed by Nissan dealers from March 1993 to September 2000. The study, currently the

largest statistical analysis of car loan data examining racial patterns, showed that black

customers in 33 states where over one-third of blacks reside consistently paid more for

cars than whites, regardless of their credit histories. In the more populous states, the

black-white gap was substantial. In New York, the gap was $405; in Texas, it was $364;

and in Florida, it was $533.

None of the lawsuits allege that the lenders are intentionally discriminating by race,

but as a Justice Department brief for the plaintiffs argues, lenders can be held responsible

for the actions of the dealers. The argument calls into question an industry-wide practice

that allows car dealers rather than lenders to determine the ultimate interest rates offered

to customers. The lender provides a rate based on income and credit history, and the

dealer can mark up these rates and even bump consumers into higher lending credit tiers

without the consumer’s knowledge of the disparity. As a result, black consumers are often
3
DaimlerChrysler Threatened with Boycott, Chi. Sun-Times, Feb. 28, 2003.
4
Diana B. Henriques, Review of Nissan Car Loans Finds That Blacks Pay More, N.Y. Times, July 4, 2001,
at A1.
informed that they do not qualify for advertised discount financing that attracted them

into the dealership in the first place.

One study conducted by Mark Cohen, a professor at Vanderbilt University, presents

the significance of the markups. Two female customers from Louisiana qualified to

borrow in the same first credit tier. The white female was given the preferential interest

rate, while the black consumer received a 1 percentage point dealer markup, resulting in

higher monthly payments even though she borrowed less than her white counterpart.5 As

this example illustrates, Blacks, according to the study, were twice as likely to receive

dealer markups, blacks paid more overall than whites, and when black consumers fell

into the top credit tier, they were less likely to be offered lender’s special preferential

rates.6

Under a proposed settlement of the 1998 lawsuits from Tennessee and Florida by

black and Hispanic car buyers, Nissan’s financing arm has agreed to stop marking up

loan rates offered to qualified minority buyers and agreed to inform car buyers their

interest rate may be negotiable. NMAC would also pay $5,000 to $20,000 to each

plaintiff named in the suit plus $1 million to America Saves, a Washington-based

consumer agency.7

5
Id. According to Professor Cohen, dealer markup is a big-ticket issue for the industry, and the new Nissan
data show why. He estimates that Nissan’s share of the dealer markup paid by black consumers alone since
1990 was more than $210 million. Based on fee-splitting formulas in place during much of that time, the
dealers’ aggregate share would have been roughly three times that amount.
6
Id. In looking at the Cohen data, Professor Ayres pointed out that the seemingly race-neutral policies of
allowing less of a markup on individuals falling in the top tier or on shorter loans also have discriminatory
effects. Whites are more likely to fall in the top credit tier and therefore avoid the largest dealer markups. In
addition, black customers tend to borrow for slightly longer terms than whites, which can also contribute to
larger markups. Such statistical analysis supporting legal arguments provides a vehicle for exposing and
challenging discriminatory practices in the market place.
7
Nissan OKs Lending Changes, Orlando Sentinel, Feb. 21, 2003, at C3.
 The studies of car sales challenge the efficiency of car negotiations and expose the

pervasive discrimination against blacks and women that characterize them and the

lawsuits and academic studies have intensified nationwide advocacy to eliminate

discrimination in car sales. Consumer advocates are lobbying for legislation that

eliminates the discretion of car dealers to mark up interest rates.8 A draft of legislation in

California would require dealers to inform consumers of the bank’s actual rate offer. 9

Some car finance companies have voluntarily agreed to cap their markup to 3 percentage

points; it is unclear whether such a limited change will be sufficient.8 California passed a

Car Buyers Bill of Rights, which took effect on July 1, 2006 with hopes to curb the

abuses that have affected California car buyers9, however, research already shows

widespread non-compliance with the new law.10

Law and economics scholars suggest that people will tend to negotiate whenever

resources are misallocated. Common experience tells us that many people in the United

States are averse to bargaining, largely because of the great inefficiency in the way cars

are marketed.

§6.9.3 Ensnaring Consumers with Tricks of the Trade

Blacks are the special targets of car dealers, but the unscrupulous among the latter

group are quite willing to use what Consumer Reports describes as the “Tricks of the

8
Through negotiations with Rev. Jesse Jackson of the Rainbow Coalition, Ford Motor Credit Co., and
General Motors Acceptance Corp. have set a new cap for markups to 3 percentage points. GMAC has also
donated $100,000 to the Rainbow Coalition/Push to educate consumers about personal financing. See Mac
Gordon, Ford, GMAC Set Loan Caps, Ward’s Dealer Business, Dec 1, 2002, at
http://wdb.wardsauto.com/ar/auto_ford_gmac_set/index.htm.
9
See http://www.dmv.ca.gov/pubs/brochures/fast_facts/ffvr35.htm
10
See Looking under the Hood - Preliminary Report (March 7, 2007) available online at
http://www.carconsumers.com/CBBR_PrelimReport.pdf
Trade” to maximize profit in their dealings with white as well as black and Hispanic

customers.11

Mirroring discriminatory dealer markups detailed above, the vast majority of car

dealership schemes perpetrated on car buyers regardless of their race distort financing,

which translates directly into larger profits. Rather than deceptively marking up interest

rates, a dealer may sell consumers a car on the spot at a good credit rating, only to call a

few days later explaining that they did not qualify for the low financing rates. The actual

contract price was subject to financing approval, which, the dealer points out, is in the

fine print of the contract. The consumer is informed that the new rate must be paid or the

contract is breached.

The fine print often reveals misleading offers, which go unnoticed until the contract is

signed and the consumer drives the car home. Take, for example, the program that many

dealerships widely advertise as a “0-0-0” financing deal. Consumers believe they are

buying a car for a steal, with a 0 percent interest rate and without making any payments,

including a down payment, for an entire year. In reality, this “deal” often requires car

buyers to make up a year’s worth of payments in one lump sum at an extremely high

interest rate at the end of the first year. Ultimately, the payments greatly exceed the car’s

sticker price. Another “special offer” urges consumers to buy a new car by guaranteeing

that the dealership will assume the consumer’s current car debt or lease. The truth is that

the dealer simply incorporates the cost of the old car loan into the new purchase price.

Aside from financing problems, car contracts can also contain mandatory arbitration

clauses, which consumers are unaware of until a problem arises. By requiring any dispute
11
Tricks of the Trade: Resist These Dealer Ploys That Squeeze You for More Cash Than You Should Pay,
Consumer Rep., Apr. 2003, at 17.
between a customer and dealer to be decided through arbitration, the dealerships limit a

consumer’s available legal remedies.

More generally, dealers can also ratchet up prices through simple sales pitch

strategies. Rather than negotiating the overall cost of the car, the dealer asks how much

the consumer is hoping to pay monthly. The dealer then adjusts the term of the car loan

and the interest rate to reach that monthly figure without having to discuss outright the

overall price of the car or disclose markups. Consumers who see these payments as

reasonable because they are within their expected range fail to see the exorbitant profit

the dealer is making.

Additionally, dealers may falsely tell consumers that their bank requires any car buyer

to purchase a three-year extension on the warranty. Although the practice is illegal in

some states, it is difficult to prove if it is not in writing. Dealers may also include

expensive amenities into the cost of the car without prior mention. Costs for fabric

protection, rustproofing, or the addition of a Vehicle Identification Number (VIN) on car

windows may total over $1,000 even though they cost the dealer only $90.

To protect themselves from dealer markups, some consumers secure financing from

banks or credit unions other than those offered by the dealership. Despite the fact that

dealers have no uniform policy against such arrangements, some dealers respond by

refusing this financing to protect their profit margin. Dealerships will also coerce

consumers unnecessarily into mandatory credit checks even after financing is secured

through outside lenders.

The bottom line is that these car dealer ploys put the onus on consumers to resist

being cheated. Consumers must be highly informed about their car purchases —informed
of manufacturing prices, their credit rating, and competitive financing options. They must

read the fine print and strike needless charges or a mandatory arbitration clause.

Ultimately, though, the consumer’s best leverage may be a willingness to walk out when

dealers refuse to back down.

Providing the details on new car dealer trickery in a race, racism text serves as a

dramatic illustration that the racial discrimination that dramatically plagues blacks in

many areas also disadvantages whites in less visible but hardly less damaging forms.