Sunday, July 28, 2013

Buying a car

We had to buy a new car last week, something I had managed to avoid since my Western Ontario days. My main memory from that purchase, which was in 1999 (!) was the joy of having the salesperson at the Honda dealership in London, Ontario lie to my face. Fortunately, I had followed the then-current advice about getting other offers via fax, plus I had read Consumer Reports so, though the experience was quite unpleasant, I did not get taken to the cleaners too seriously.

It struck me at the time, and it still strikes me now. that making the experience so unpleasant probably leads people to buy cars less often, and so may, on net, make the car industry worse off, relative to an equilibrium of posted prices and honest dealing. I suspect though that it is not in the interest of any individual dealer, and perhaps any individual brand, to go it alone in that regard. Saturn did not persist, despite its posted prices. I am told that now Mini occupies the posted price niche, though there are many ways to take advantage other than via the base sales price for the car.

What struck me about this round of car-buying is that the information environment is much richer. The document above is something I got via American Express. I believe that the same underlying firm also provides information via Consumer Reports. Our salesperson also provided a similar, but less informative (just the mean, not the distribution) document from Edmunds. The document above shows the distribution of purchase prices for the particular model of CR-V that we ended up buying over some time period in my local area. We stopped going back and forth with the dealer when we got down to about the 20th percentile of that distribution. As you would expect, each additional reduction in the negotiated price became more time consuming and less pleasant to accomplish. The 20th percentile is about where MC = MB given our time costs and tolerance for aggressive interaction.

We had a relatively (and relatively is a very important modifier here) unobjectionable salesperson. What struck me in standing around the dealership and also in our one conversation with the manager is that most of the staff other than our salesperson almost seem to deliberately dress and act like carnival hucksters. Is this really profit maximizing?  Our guy had a different approach. He was a bit chubby and rumpled and not as slick as the others; for that reason, he came off as more honest and sincere. The night we went to pick up our car he had several other customers and no one else in the dealership had any, so apparently his approach is working.

In any case, we like the car. I hope it lasts at least as long as my sadly departed Civic so that I don't have to go through the buying process again any time soon.

Oh, and a free paper idea. It seems to me that the much richer informational environment should have led to a reduced variance in sale prices. If you write the paper, please send me a copy.


Jody said...

Congrats on the new car, professor! I hope you're happy with your purchase. I noticed you didn't talk about how TrueCar played into the gender dynamics of your negotiations. Have you seen this ad?

econjeff said...

I had not seen the HuffPo piece or the ad to which it refers. I have seen the economic literature which, last I looked, shows that women tend to pay more for cars than men. In our case, my wife and I played "good cop, bad cop". I was the grumpy bad cop. It seemed to work well. On their side, our man Evan was the good cop and the manager was the bad cop. What a lot time and energy wasted on transaction costs.