Tuesday, December 22, 2009

Game Theorist Buys A Car

The political scientist and applied game theorist Bruce Bueno de Mesquita has described a very intriguing approach for new car purchases. Mesquita, a master quantitative negotiator and strategist, is concerned with the signals that the would-be car buyer sends to the dealer when he shows up, finds a model that he likes, and begins the process of haggling over price and features. Salespeople know to draw out the initial courtship phase as long as possible, and many employ persuasion techniques straight out of Cialdini's seminal work in order to get the buyer to commit psychologically to the vehicle, particularly after a favorable test drive. The salesperson usually leaves the buyer in a waiting lounge area so that he can go "discuss the deal" with his sales manager. Once again, the wait may be extended, or perhaps the good cop salesman/bad cop faceless manager routine is iterated through several times in order to try to create a sort of Stockholm Syndrome effect, wherein the buyer sympathizes with the salesperson and thinks that the salesman is his friend, is looking out for him, is making reasonable concessions, is on his side against the tyranny of the sales manager...

As Bueno de Mesquita explains: "...But there you are subjecting yourself to the salesperson's pitch, standing before a car dealer in his or her place of business, feeling compelled to haggle over the price, probably to your embarrassment and certainly to your disadvantage. The whole time you're talking to the dealer you're revealing information that sets you up to pay too much.

"Being there is what game theorists call a costly signal. It's a costly signal because your expenditure of time and energy announces that you want to buy, that there's a good chance you'll buy from the dealership you're visiting rather than go elsewhere, and, especially if you have kids with you, that you want to get out of there as quickly as possible. That first step, then, your simply being there, translates into strengthening the salesperson's hand in getting a good price. They believe you're ready to buy, and you've done precious little to dissuade them. Score one for the dealer, none for you."

Bueno de Mesquita goes on to discuss the informational asymmetries that the dealership's salesman enjoys. For example, the buyer may have done online research and found the invoice price of the car, but the salesman has information about local market conditions---aspects such the popularity (or lack thereof) of a certain color and how that information can be used to pile on additional costs. The salesman may also ask for you to quote him a price, and you may feel compelled to give something that is at least credible. The salesman's game is to make you feel that your offer is absurdly low, but that he will attempt to "work with you" and go talk to his manager. Alternatively, the salesman may say that the dealership has a no-haggle sticker price policy, which will probably lead to an even worse, perhaps much worse, result for the buyer.

A game theoretic solution? The buyer starts by doing online research and determining exactly what he wants. When he has determined color, options, and so on, he finds every relevant dealer within a 20-50 mile radius of his home. Then he calls each dealership with a very precisely articulated proposal.

Bueno de Mesquita: "Here is my typical spiel: 'Hello, my name is Bruce Bueno de Mesquita. I plan to buy the following car (list the exact model and features) today at five PM. I am calling each of the dealerships within a 50 mile radius of my home and I am telling each of them what I am telling you. I will come in and buy the car today at five PM from the dealer who gives me the lowest price. I need to have the all-in price, including taxes, dealer prep (I ask them not to prep the car and not to charge me for it, since dealer prep is little more than giving you a washed car with plastic covers and paper floormats removed, usually for hundreds of dollars), everything, because I will make out the check to your dealership before I come and will not have another check with me.'

"If you are making your first call, be sure to tell the salesperson that you will tell the next dealer the price you've been quoted. After the first call, make sure the future salespeople know that you will be repeating whatever is the lowest price offered to you so far. That way, future dealers know what price they must beat, and the dealer you are currently talking to knows that if he wants to have a shot at selling you a car, he had better quote his lowest price."

Bruce Bueno de Mesquita states that he has purchased Hondas, Toyotas, and Volkwagens using this competition/auction-structuring price-discovery technique, and he has always managed to defeat even the Internet-quoted price with it. He has taught it to his students and many of them have also employed the method, with similarly excellent results.

3 comments:

  1. I wonder how much leverage you lose by financing the car, and not being able to play the "one and only one check" card. Of course, you aren't required to sign the deal if you don't like it, but my guess would be it introduces unwanted ambiguity to the proposition.

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  2. Leo, I think that is a very good point. You might well have to secure financing from a third-party prior to being able to make use of the ultimatum. Bueno de Mesquita may be in a position where he can operate on a cash basis, but I suspect that most of his students are not---I wonder how he deals with this complication.

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  3. Regardless of all this, it doesn't detract from the actual lesson of the story which as quite enjoyable. I don't mean to be "that guy", but considering the applicability of the example, I was curious of how best to utilize the model assuming I can't routinely cut checks with two digits left of a comma (unless we are in Europe).

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