Internet and the efficiency of decentralized markets: Evidence from automobiles

•Internet increased volume of trade in the California used car market from 1997 to 2007.•7.2% more trade occurred in 2007 than had Internet remained at 1997 penetration level.•Welfare gains from reductions in market frictions are substantial.

We estimate the effect of Internet on the volume of used car transactions. From 1997 to 2007, Internet use tripled in California, causing an increase in volume-of-trade of 7.2 %. This implies a substantial welfare gain via improved allocative efficiency.