How to use game theory to buy a car
timesonline.typepad.com
timesonline.typepad.com
What power does the salesman have? None. He has cars, he wants to sell them. You have the money. You have the power.
He postures that he has the power but really, you can walk out at any time. There are other dealers, there are other kinds of cars, there are other sales guys at that dealer, and you can come back another day. Used cars maybe you don't see great deals all that much but on a new car, there will always be another car.
As a buyer, I want the seller to know two things to make a deal.
1) I'm serious about buying, and have the money/financing to buy TODAY. I can make a deal if he makes a deal. I don't HAVE to buy today, but I CAN. That makes a big difference. No one wants to quote a price that they can never match again, often times there are specific reasons why they can get a price at that moment but can't in general.
2) I'm not interested in the fine particulars. I want the best price. I will look at his lot and his competitors lot, and buy the car that is closest to what I want FOR THE BEST PRICE. Often they have inventory they are desperate to get rid of and will do it with 0 margin or at a loss just to get rid of the car.
An example, my last car was supposed to be $328 a month, but I paid $208 because I got the car in a dark gunmetal gray instead of the black I wanted, even though all the other features were the same no one wanted that color. I eventually grew to like it. I bounced between 3 dealers and they knew I had the cash, they knew I had the credit, and they knew I was flexible. Their initial offer was $250, I squeezed them down from there. If I had just faxed them like this article says I would have gotten nothing because it says I want black, and they didn't have the car in black. If you say you want the car in any color they aren't going to give you a good price because you sound flimsy.
Also as a note, never show one dealer another dealers quote. Tell him the number but NEVER show him the quote. You can cause serious problems for the original dealer and lose your deal. Often times you get these deals with things like the dealer getting a manufacturer rebate that you don't really qualify for but they can fudge some how. You play nice with the dealer, they will play nice for you.
I like your approach much better, going in with maximum knowledge is key.
The one I've read about and wish I had the nerve is to get a few thousand in hundreds and right off spread it out on the table in front of the salesman, say this can but yours today, just hit my price.
How so?
If they can collude on price then they can change the outcome of course, but for that its not enough for to all know what you are doing (you have after all told them all everything from the beginning, except what offers the others are making...) In order to collude, they have to know what you are doing, all agree on the same price, and they have to have all players in that market involved.
It could certainly done, but has little to do with knowledge and more about the ability for them to come to an agreement amoungst themselves and then stick to it.
This article has a fascinating discussion of the "4 square sheet" that dealers use to fudge negotiations. Two of the squares are price and financing (included in your monthly amount), and the others are trade in and warranty. People generally get a better deal if they're negotiating solely on price:
http://www.edmunds.com/advice/buying/articles/42962/article....
On the 4 variables. I can see their point but I never get into that stuff.
My experience has been that you can usually sell the car yourself for more than trade in value, and these days with craigslist and ebay its not very difficult. I've sold 2 cars this year and you know bad the economy is.
I also don't really finance. I guess I will have to in the future but so far I've been able to buy all my cars cash. I buy most coming off a lease 2-3 years old.
And I definitely never buy an extended warranty or dealer warranty. The dealer I bought that car from is gone now and its only 4 years later, the manufacturer's standard warranty is all that matters.
Huh? If you don't finance and both of the cars were the same price, how does the difference in term mean anything?
That said, if you pay cash for cars, I really don't understand the monthly prices in all of your posts. It just adds confusion.
Extended warranties that aren't backed by the manufacture aren't worth the money. The dealership going out of business isn't really relevant, though, as those warranties are "owned" and serviced by a third party warranty company.
An insightful look into a dying business model, built on complete disrespect for the customer, and being replaced by internet based businesses that provide better service and lower prices.
I once found a car salesman who was asking way too much for a used car on his lot. He refused to budge on price. I couldn't believe both that it was priced so high above market rates or that he wouldn't come down on the price at all. I kept asking, don't you need to go talk to your manager?
I decided that eventually he would come around and called him every day for two weeks with a low ball offer. Eventually the car sold to someone else for $100 above my offer. If rational behavior is to maximize the sale price, then this was not rational behavior. A simple counter offer would have closed the deal with me and netted an additional $500 for the dealer.
After that experience I've often wondered if there are other incentives for car salespeople beyond money. Maybe there's an opportunity cost of selling to a good negotiator when a bad (i.e. normal) negotiator might walk into the dealership. Maybe car salespeople just don't like being on the wrong side of a deal. Maybe they get harassed by coworkers when they strike a bad deal.
If the method works, I'd still be suspicious of the reasons. Maybe calling for 20 prices is a good idea just because one of them, independent of the others, really wants to get rid of the car.
Yes, for 30 years. It's simple supply and demand.
I doubt if this would work well for a 2010 Camaro, but there are probably lots of models it work work well for.
My point, though, was that the article has presented a hypothesis without any data to back it up. In a way, it's worse than an anecdote, because I'm not sure even the author has tried this method.
For used cars the dealers are making money on trade-ins even if they let it go far below the posted price. Any used car they sell off the lot is going to be a bigger profit than cars going to auction. A lot of times you can simply look at the dealer's lot and see how crowded it is. If it's packed with lots of used cars there's a great chance you can walk in and say I will pay $X and get the car. They just want to get it off the lot to make room for better inventory.
My advice, if you're looking for a used car, is to find a dealer that doesn't deal with a huge volume of used cars. They're often selling their trade-ins at a good value because they don't have the volume to make the auction process work in their favor. They'd much rather just sell them off the lot.
No question, there is much one can do to shift the power. But there is a reason why no one has yet gotten the car purchase process totally online: the dealers do indeed have some power. They control the distribution of the car to you, and they have location-based impact that, for some people, is important. At the end of the day, you are buying from one of the dealers, and if they are all above your price but you want the car, well, you either pay more than you think you should, or change your car choice.
If you don't care about the "free oil change" services or other post-sales issues involving the dealer, and have the time to deal with multiple dealers and a potentially extended process... then go for it. If you are in an area with few dealers for the car you want, however, you may find the negotiation requires a different approach than merely a PDG assuming multiple equal competitors.
If my local dealership goes out of business, the next closest one is approximately 50 miles away. That'd be so incredibly inconvenient that I'd almost assuredly end up selling the car and buying a different marque that was locally serviceable.
Auto dealerships add value for me, and as such I will pay a small premium over the marginal cost to help make sure they're incentivized to still be there in 5 or 10 years.
The seller has perfect information (knows all the flaws) and the buyer has imperfect information (only knows what information can be gathered from a test drive and superficial inspection).
Theoretically, and as predicted by a classic paper by Economics Nobel-winner George Akerlof, yes.
But practically, no. For various reasons the used-car market does not behave like the theory of asymmetric information predicts. Carried to its logical conclusion, the theory suggests the market won't exist at all -- and yet clearly it does! See the Wikipedia article for some discussion:
http://en.wikipedia.org/wiki/The_Market_for_Lemons
From personal experience: I've bought a couple used cars -- and always gotten great value. My sister and other members of my family have had success as well.
And plenty of personal-finance gurus will tell you that you should never buy a new car -- the premium over a reliable used-car is rarely justifiable, except on emotional/fashionable grounds.
It's quite easy to get a professionally accredited car inspection for used cars in the UK. It doesn't cost a lot, and it means the buyer regains complete bargaining power.
Of course, it isn't economical to do this for very old cars, or for a lot of cars.
But every single shop I've been didn't have a few components that I've choosen, so I couldn't simplify decision to only one variable.
I've even thought that they may do it so I can't compare prices.
Did anyone else think that the author meant North Korea?
"The South Korean automobile industry is today the fifth largest in the world in terms of production volume and the sixth largest in terms of export volume."
But the author may well have meant North.
Corollary #1: Do the same thing, but everything in writing.
Corollary #2: Set up a leasing company and put Corollary #1 on your letterhead.
Figure out the lowest price they can sell at, add $100 to that, walk out if they say no.
If you really want the car, add another $100. Still no, stand up and walk out. Really, you can live without the SUV.
Tell them you will discuss financing LATER. You have the total amount in cash [right?] so you can decide whether the financing deal they offer is better than a CD or T-bills.
If you don't have cash [stupid] get financing BEFORE you negotiate - talk to your credit union or LOCAL bank first.
How many times does this simple info have to be shared?
Oh, new Internet twist: do it all online.
Do not buy the floor mats and rustproofing.
Please elaborate.... How could you possibly know this? Do you have insight into the dealer's cost of capital from his lender? If the dealer sells a bunch of Trailblazer SUV's, does he get allocation of 2010 Cameros that he can sell for $5K above sticker?
Why are you adding money to the lowest price they can sell at? That is your target price -- the lowest price they can sell will always be the lowest price that includes a profit (or the smallest loss, for brands like Chevy). Besides, most of the profit comes from the optional packages, which are marked up 200-500%.
also, every modern car sold today has anti-corrosion measures, as well as corrosion warranties, so i don't see why you would pay extra for rustproofing. this might've been a good idea 20 years ago, but i don't think it's necessary today.
He'd get the "best price" and then tell the buyer to say, "that includes the mats and metallic paint, yes" (or similar). Basically the guy thinks he's secured it, you hit him for that last bit.
He did a general buying show too.
Re the article - not all dealers are equal: You come back at 4pm, the cheapest dealer has had the alloys switched off or put on cheaper tyres (that's £50 at least). You've no time to go back to the others. You buy? If you don't do you think the other dealers will play your game the next day or just see you as a time-waster?