January 10, 2008

Fool me once--shame on me. Fool me twice--and you should be a car salesperson.

Roman Kozhevnikov / Prof. Eubanks / ECON 398-OL1 / 10 Jan. 2007


You know how we always argue about the fact that you always buy your cars from the same dealership in Pueblo? Well, I’m right—you are being taken—and now I have even more ammo to back myself up. See, I’m reading this book called The Undercover Economist, and one of the chapters in it explains game theory. You should read this chapter, because, sorry to say (thousands of dollars sorry to say…), you could use a lesson. Since watching A Beautiful Mind didn’t seem to make John Nash’s ideas rub off on you, let me explain game theory.

According to Tim Harford, the author of the book, “a game…is any activity in which your predictions of what another person will do affects what you decide to do” (147). Think of the game Battleship; you try to guess where I will think your ships will be, so you put your ships somewhere else. It is not hard to see that this can quickly become an I-know-that-you-know-that-I-know-that-you-know type of situation. Buying and selling a car, or buying and selling just about anything for that matter, is like a big, expensive version of Battleship. For example, car dealers put a high sticker price on cars, hoping that young, na├»ve, American customers will pay that price. I say “American,” because most Americans are not used to bargaining to get a better price for something like people in many other countries do every day.

So, intelligent customers know that the sticker prices are inflated, and they also know that salespeople will do just about anything to make a sale and grab the commission from it. This is where game theory comes in. The customer and salesperson must “read” each other. That is, if the customer figures out the salesperson, then the customer gets the lowest price the salesperson is willing or able to offer for the car; if the salesperson figures out the customer, then the salesperson gets the highest price the customer is willing or able to pay. Since you are the customer, let’s see how well you played the game a few months ago to get the lowest price for the SUV you bought.

You bought your last three cars from the same dealership, so the salesperson knows you are loyal to the dealership and probably did not shop around for this car very thoroughly, or you did shop around but have chosen to forgo a less expensive vehicle for the reliability and familiarity of this particular dealership. This close relationship with the dealership also made you feel relaxed enough to tell the salesperson that you are buying this car as a retirement gift for yourself. Now the salesperson knows that, if you are financially stable enough to retire at 56, then you probably have more money to spend then you originally intended to spend. Finally, the salesperson knows you are very dedicated about buying a car from that dealership, because you drove down from Colorado Springs to buy a car, even though the company has a dealership in Motor City.

What about this situation makes you think that you paid the lowest possible price for your car? For that matter, you ended up buying an eight-passenger SUV, even though you and, rarely, your wife are the only people who will be in it. I know you think the dealership must have given you a good deal because you are a returning customer, and they don’t want to lose your business. This might be true, but you certainly did not get the BEST deal or the most sensible car, which, even at the full sticker price, would have been cheaper than the SUV they suckered you into buying.

So, I guess what I’m trying to say is, if and when you end up buying another car, try to hide your ships a little better!

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