January 6, 2008

Withholding information. Assuming you have information to withhold.

Harford’s book thus far has done a tremendous job of putting into words what I could not in my own life. Having the economic mind that I do, I constantly am able to explain why prices are what they are and consistently arrive at this dead end of, “well that’s the fair price and I just have to deal with it.” But what if I want to pay less than the fair price and I can bargain to do so? In order to do that I would have to arrive at a deal lower than the fair price which would either indicate that the seller is not going to sell to me or there was information with-held and he will sell to me albeit that the original description of the item is probably not correct. As I look through the blogs posted thus far I see a lot about how this book has shown people how they are getting taken or how this will help people be more educated on their lattes, etc. However, what I have read in this book is better ways to equip myself to not just avoid being taken at the auto dealer, but to take the auto dealer himself.

Harford talks in chapters three and five about how if information is withheld then markets don’t work efficiently and unfair prices are usually reached. Thus was the case of a recent purchase of mine, however, I withheld information as well that offset the inefficiency of the first withholding. Recently my wife and I bought a new (used) car. A 2002 Subaru WRX Wagon with some fun jargon that I won’t toss out here to make the car faster than it already is stock. The book price on this car: $14350. The price we paid: $8700. Now I had made offers similar to this to dealers on WRX’s for weeks and it was no surprise every time when they turned me down. It’s a popular car, especially in Colorado and since I knew the cars I was looking at were in good condition it was hard to justify being frustrated with those dealers. This was a time for what Harford calls the “undercover economist.” I knew that to get a WRX in this market that was in good shape I would have to pay book value or more. I know enough to tell if the car is in good shape so I could point out flaws and have the price adjusted. But here’s the catch and how I actually beat the dealer. Typically, if someone finds a flaw with a car, it is reasonable to say that a dealer will usually adjust the price of the car based on what it will cost to make that repair. I.E. if the car books at $14350 and I see that the water pump sounds bad I will require that the car is adjusted by the $600 it would cost to replace the water pump on that car. Since I have acquired the knowledge to fix the car myself and withhold that information from the dealer by acting like normal and taking it to a mechanic to have it inspected (even though I can do a better inspection myself), I request adjustments for market value of the adjustments and then do the adjustments myself at a fraction of the cost.

Thus was the case of our new car. I ordered the car from Texas sight unseen. Immediately this screams information withheld and whenever I heard the dealer agree almost instantly over the phone to my first offer I knew that there was definitely information withheld. However, at that price, I figured I could buy the car and drop a new engine if it needed it, and still sell the car for more than I bought it. Well, truly the dealer did withhold information. He took pictures of the rear tires that were good while the fronts were bald, assorted interior pieces were missing, etc. First of all, we assumed that we were already receiving a discount off of the book rate due to the lower demand for Subarus in Texas. So that should have brought the value of the car down around $12000 and thus was the amount I would have not wanted to exceed for a good car coming from Texas. We paid $3300 less than that and had I not fixed stuff myself I would have ended up paying around Texas market value for the car to be in good condition after all. However, since the dealer assumed I would be paying typical labor rate for those repairs and he knew that I assumed he was withholding information, he gave me an adjusted price that has drastically larger discounts than what I actually repaired the car for.

Did I get a deal? Yeah! But then again, even that is simple economics and didn’t come for free. There were costs and time associated with my knowledge. To me the core point of this book is just that… all costs within an economy can in some way be accounted for. While I did receive a good deal on the car now, it did cost me something at some point to attain the knowledge I had to fix the car for a cheap price. So the lesson is that you can be information withholders at their own game but you have to have some skill to back it up or it’s all for nothing.

2 comments:

Larry Eubanks said...

"But then again, even that is simple economics and didn’t come for free. There were costs and time associated with my knowledge. To me the core point of this book is just that… all costs within an economy can in some way be accounted for. While I did receive a good deal on the car now, it did cost me something at some point to attain the knowledge I had to fix the car for a cheap price."

Brendon, I want to offer a bit different lesson that we might learn from your discussion as economists. I like your pointing out that there were opportunity costs beyond the dollars you paid to obtain the car. On the other hand, you spend a lot of time emphasizing the "market price" that you paid. Perhaps the different lesson that we could learn from your discussion is that the price we see in the market is not necessary the price paid by the buyer. At least some part of the price paid by the buyer involves the buyer's opportunity cost, and this is something you and I cannot see in general, as economists, when we observe market prices. Or, consider that exchanges between buyers and sellers often occur at specific locations (part of the latte story, eh?). While you and I can see the "price" of the exchange, the buyer had to get to the location to make the purchase and getting to the location involves and opportunity cost. Thus, the actual price paid by the buyer was greater than the exchange price you and I can observe.

brendon newton said...

Good point. And since I didn't point it out before, I didn't go to Texas to get the car. Shipped here for $300. My oppurtunity cost of leaving this state for a few days and going to that God forsaken place would have been much higher than $300.