Monday, September 30, 2013

Lessons from another car-buying experience

If you walk into a car dealership and start negotiating over buying a car, there are phrases that you will likely hear.

A few hundred dollars
"We don't want to lose you over a few hundred dollars."

This is a trickier phrase than it first appears.  Digging past the facade of friendliness, the phrase accomplishes several things: (1) it makes the original price seem reasonable, (2) it makes the dealer seem willing to negotiate anyway, and (3) it makes you think in terms of hundreds, not thousands, of dollars.

Suppose you're considering a $20K-$30K purchase.  A few (2-3) hundred is around one percent of the price.  Yet, most car buying guides (example) suggest that your target price should be around 10 percent lower than the price posted.  Regardless of what the salesman is trying to get you to suggest, you should ask for a couple thousand dollars off the price, not a couple hundred.  If the dealer is not willing to go there, walk out.  Car manufacturers make these things on assembly lines.  There are plenty of others around.  Plus, you can always come back.

Make us your best offer
"What price will it take for you to make the purchase right now?"

On its face, this phrase gives the control to the customer.  Being in the position to set the frame of reference for the negotiation is great.  Moreover, in this setting, making a take-it-or-leave-it offer theoretically gets you the most surplus in a  surplus-splitting negotiation.  When the salesman asks you this question, you have the option of making such an offer.  That kind of control is nice, but it is limited by several factors.

First, you don't really know the salesman's reservation price.  They do a really good job of hiding that, and pointing to the sticker price as the focal point in the negotiation.  Moreover, this reservation price is a bit fuzzy because it depends on the dealer's evaluation of how likely another buyer will walk in the door and pay that price or higher (and the cost of getting a comparable car on the lot before that happens).  That's hard to predict, but the dealer knows that much better than the customer.  In this case, information about these factors protects the dealer from overly savvy negotiators.

If you knew the dealer's reservation price, your best bet would be to make a take-it-or-leave-it offer at that price.  The dealer would still make a profit on the books, but he'd be indifferent between selling to you now, and waiting for the next guy who is going to (in expectation) pay a higher price.  Given that you don't know the reservation price, you have to feel it out, and that will tend to raise prices -- both the price that others would pay and yours.  Note: indirectly, this is going to improve the dealer's outside option, and thus, you're going to be stuck bargaining with a less willing negotiator.  Not an accident, I'm sure.

Second, the what-will-it-take-right-now tactic manipulates customer information.  If the customer hasn't done advance research, the "right now" part of the question really bites.  If you don't know what price to ask for, you have no business answering this question.  Plus, there is only so much you can look up while you are under the watchful eye of a car salesman.  Smartphones are great, but they're not a perfect substitute for a laptop and a cup of coffee to mull it over.

Even worse, the dealer has the option of rejecting bad offers and accepting good ones.  If some customers make unnecessarily high offers when put on the spot, this option is valuable for the dealer and costly to the customer.  Again, the dealer can just reject the unacceptable offers, so it is hard to accidentally stumble into a good deal.

Finally, the what-will-it-take-right-now tactic tends to follow closely on the heels of the dealer's framing of the negotiation.  You just heard that they're not willing to lose you over a few hundred dollars. If you haven't spent time looking up fair prices, thoughts creep into your head.  Maybe asking for $500 off will seem like a tough starting position.  Is it crazy to ask for $1,000 off?  A few hundred dollars could buy a few weeks of groceries.  

The dealer wants you to think in these terms because they've built in lots of surplus for themselves, more than a few hundred dollars.  I think they're counting on you making a mistake under pressure.


Believe it or not, all of that is context.  This post was motivated by the fact that we recently went through the car buying process to buy a second car.  After having another car buying experience, I am glad I will not hear these phrases any time soon.

Informed by our previous buying experience, we did our due diligence.

  1. We narrowed down the make and model that interested us.  This facilitated head-to-head comparisons across dealerships.
  2. We went with a Certified Pre-Owned vehicle.  This slashed the price significantly while retaining most of the factory warranty.
  3. We used Kelly Blue Book and Autotrader to get an idea of what a fair price is before going into a negotiation.
  4. We test drove cars at multiple dealerships, and we let the salespeople know that we were doing so.
  5. We walked out of a couple of negotiations when our terms were not being met.
At the end, we were looking at a Certified Pre-Owned vehicle that was marked down $3,000 below the Kelly Blue Book price for a car of that vintage, with those options, and with the number of miles it had.  We knew that the sticker price was a good deal, but we asked for an additional discount of $1000 anyway, as a start to the negotiations.

We had also conveniently left a chicken in the oven at home, and went shopping around dinner time.  I suppose this could be a credible commitment to leaving the dealership.  Telling him about our chicken, I told him we would start negotiating the next day with $1000 less than sticker (already a good price), and I insinuated that I would commit to buying at the price the next day, but not today.  I was being fully transparent.  I was hungry and our chicken was getting dry.  I was going to come back the next day, and I would pay what I said I would pay.

The salesman must have thought of this as tough negotiating because he came back and said "What price would it take to get you to buy this right now?"  Annoyed, I slashed my offer by another $2000.  He'd have to take $2K off of a good deal for me to delay dinner.  That's not my usual reservation price on delaying dinner, but I really wanted to just pick up the negotiation the next day.  

He went back to his boss, and came back saying, "Boss says it's a no go on $2,000 off, but $750?"  He held out his hand to shake.  
"No.  Not tonight."  
He countered.  "OK, $1,000 off.  That's what you originally asked for, right?"  He held out his hand again, eagerly.
Me: "No!  I said I'd do that tomorrow, but not tonight."
Him: "So, if I go back there, and tell him that you're firm on $2,000 off, you'll do the deal if he agrees?"
Me: "That's what I'm saying."

After a few moments, the dealership agreed to this deal, and I am puzzled.  I flat-out told them I would pay $1000 more the next day, and I was being truthful.  They must not have believed me.  Even if they didn't think I was coming back, they must have (a) higher inventory costs than I thought, (b) lower turnover than I thought, or (c) both.  Regardless, we have a new-to-us car, and we got a great deal.  When our cars wear out, we may be going back to this place.  And, maybe that's the point.

Friday, September 13, 2013

"... but thinking makes it so."

Last week, on my parents' first trip to visit us in Colorado, my parents brought a car full of my old stuff that I have done without for the last 5+ years: Trophies, certificates of achievement, pictures from camp, books that I bought and never read, my baseball card collection, etc.  With the CU-Boulder campus closed today, this was a good day to start going through that stuff.  It is an interesting walk down memory lane.

In the midst of the trophies and memorabilia, I found a journal that was empty except for one page, and on that page, there was a handwritten poem that I had written when I was in high school.  In case you're interested in what Teenage Tony had to say, here is a picture and the text from that poem.

Some say happiness is like a butterfly
fluttering in the sky above.
Some see life as a pesky moth, 
which makes everything tattered and rough.
These two divisions of humanity
share a common thread,
though one sees joy, life and excitement, 
while the other wishes he were dead.
What is common among all walks of life
is the determination of their destiny.
The direction of thought that one begins 
has the power to chain or set free.
Freedom lies in optimism
and a smile on your face.
Slavery bears the shackles 
of derogatory thoughts and distaste.
Bad or good do not exist
except for in sacred thought,
and eternity will continue on
as good and bad are forgot.

Thursday, September 12, 2013

American Exceptionalism

Vladimir Putin speaks to the American people about Syria. Here's his concluding paragraph:
And I would rather disagree with a case he [Obama] made on American exceptionalism, stating that the United States’ policy is “what makes America different. It’s what makes us exceptional.” It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation.
Some comments on American exceptionalism. 
  1. John McCain took exception to that point, calling it "an insult to the intelligence of every American."
  2. Another way to express American exceptionalism is to say that "The United States is the greatest country in the world."  The fact that most Americans would unthinkingly agree to this statement speaks volumes about American culture.
  3. Based on Putin's choice of words, Putin claims that Obama was encouraging Americans to believe that we're exceptional.  If Putin understood American culture, he would know that Americans already buy into American exceptionalism, by and large.  In other words, Obama was echoing, not injecting, that American sentiment.
  4. Having completed graduate school with a number of people from foreign countries, I have encountered pushback on American exceptionalism before.  To a German, for example, the ideal that you are exceptional because you're American is strange and off-putting.  It is likely that Russians feel the same way.  Nevertheless, American exceptionalism is part of American culture.
  5. On the other hand, if Putin really understands American culture, his comment about exceptionalism is a deliberate barb designed to insult Americans.  Perhaps, this is most likely.  That brings us full circle to McCain's comment.  I have to disagree that Putin's words insult American intelligence.  Putin's column is an insult to American culture, not to American intelligence.  Either way, it is an insult.
I wonder how diplomacy will evolve if we're already at the stage where leaders of other countries are insulting our culture.  Regardless, I think both sides need to take a break to (re)read Dale Carnegie's How to Win Friends and Influence People.  We desperately need both sides to have some real insight into what the other side is thinking.


Sunday, September 8, 2013

Attention by Country to an EduEcon YouTube Channel

About a year ago, YouTube added an interesting feature for people who upload videos -- it started reporting to uploaders how much time people spent watching their videos.  Don't worry.  These are aggregate statistics.  From these statistics, I still can't pinpoint your viewing habits too closely as a content provider, but there is an interesting depth to the amount of information.

For example, YouTube reports the total and average watch time by country of viewership.  From my YouTube channel's views, there are some interesting patterns.  There are 24 countries where people watched at least 10,000 minutes of my channel's videos.  Restricting to these 24 countries (to reduce statistical anomalies), the five nations that paid the most attention to my videos are:

1. Jamaica (47.6% of video length)
2. Sweden (46.6%)
3. Portugal (46.2%) 
4. United Kingdom (44.4%)
T5. Australia and New Zealand (43.9%)

The five nations that paid the least attention to my videos are:

1. Turkey (33.7%)
2. India (35.3%)
3. Malaysia (35.6%)
4. Spain (38.1%)
5. Hong Kong (38.5%)

What can account for such differences in attention?  Based on the countries that showed up in these lists, I have several ideas, but before I reveal these, I would like to see what you -- the reader -- think.  One thing that jumps out at me is that the United States, my home country, is not in the top five (or the bottom five for that matter).

Tuesday, September 3, 2013

What is your vision for the future?

Last night, I learned the sad news that Ronald Coase died at age 102.  In his career, Coase fundamentally changed the way economists think about firm and market transactions, externalities, law and economics, and even, durable goods.  The study of economics is much richer and more full of life because of Coase's fundamental contributions to the field.  The economics profession owes Coase a great debt of gratitude.

I could write a detailed narrative on how each of Coase's contributions have permeated the field, but I am sure that others will take on this task.  My comparative advantage lies elsewhere.  Instead, I want to share a story about the only time I met Coase at a Ronald Coase Institute roundtable this spring in Chicago.

I was invited to this roundtable because I participated in in the 2008 Ronald Coase Institute (RCI) Workshop in Los Banos in the Philippines.  The RCI workshops are a part of Coase's desire to support academic research by young scholars on developing economies.  These workshops are an important part of Coase's legacy.  The people at the Ronald Coase Institute (Lee and Alexandra Benham, and Mary Shirley, in particular) work tirelessly to promote research on new institutional economics.

I saw the Chicago roundtable as a great opportunity to visit with the RCI folks I met in the Philippines, as well as meet other people who are part of the Coase Institute network.  As such, I signed up without any expectations. Although the event had Coase in its title, I had no idea that Ronald Coase would be there.  He wasn't slated to speak, and the thought that he might actually attend never crossed my mind.

To my surprise and delight, Coase showed up halfway through the roundtable.  I was not the only one who was surprised.  Coase's arrival caused a small commotion that actually led to a slight pause in the program (because the speaker was as astonished as I was) while he got settled in.

After the roundtable discussion and before dinner, Lee Benham took the opportunity to introduce me to Coase.  At age 102, Coase was hard of hearing and in a wheelchair, so people who spoke with him had to kneel next to him and speak up.  This humbling way to meet Coase only magnified the significance of the moment.  What do you say to a man who revolutionized economics and helped establish the field that you so humbly try to advance?  Before I said much, I was whisked away.  Coase was the man of the hour, and lots of people wanted to talk with him.  Lee Benham took a picture.

After meeting Coase, I went back to filling my plate for dinner, and looking for a place to sit.  I figured that the excitement of meeting Coase before dinner would be the highlight of the evening, but it was not.  Just as I began looking for a table to sit, Lee Benham pulled me aside and told me that I would be dining with Coase. This distinct honor was not phrased as a question ("Would you like to dine with Coase?"), but as a command ("You will be dining with Coase").

Again, what do you say to Coase when you are thrust into dinner conversation with him?  Compounding the natural anxiety of what to discuss, conversation was difficult because he was hard of hearing.  Nevertheless, we eventually had a nice conversation about support from our families of research (Coase's family never really understood what he was doing) and a little about my research on institutions.  Then, Coase asked me, "What is your vision for the future?"

The question floored me.  Most people who are at the sunset of their lives are almost too excited to share all of the experience that they've had, yet Coase wanted to know how the next 102 years would turn out (and what I thought about it).

Back to the question, I expressed optimism that we would meet the challenges of our world, and that 20 to 50 to 100 years from now, the world would be a better place due to the accumulated wisdom of creative minds.  Then, I concluded, "but I'm young enough to be optimistic."  Coase replied, "I'm old enough to be optimistic."  More than just reassuring me, you could see it in his eyes that he really took an optimistic view on the future.

Now, with Coase gone, we are left with his legacy, and we are blessed to have his vision for the future.  Although Coase will be missed, the world has been greatly enriched by his life and work.

Sunday, September 1, 2013

I knew textbooks were getting expensive, but...

...this is unreal (screenshot from Amazon).

Apparently, this is the paperback version.  The hardcover version sells for a mere $223.87.  I wonder if this is some sort of experiment, or just another automated pricing scheme gone wrong.