Thursday, January 30, 2014

Some interesting questions about car dealers

Relating to my posts on my experience negotiating for and buying a car, a reader wrote in with the following anecdote:
I came across your article regarding the Colorado auto dealerships and Sunday sales, and found it very interesting. 
We had a similar issue in Rhode Island some years ago.  Dealers also had to be closed on Sunday, and there was a fight (by many dealers) to be able to open. 
Being such a small state, the issue was that with dealers open in Massachusetts and Connecticut, these sales were actually "lost" by the dealer, as it was easy to go to a competing (and open) dealer on Sunday in one of those states. 
The state of Rhode Island also lost a significant amount of sales tax revenue when that happened.  This point was probably the main reason why the law was overturned, and dealers are now open on Sunday. 
What led me to your story, however, was something else entirely. 
I [...] have always been fascinated by economics.  I am struck by how dealers cut prices (to a point where they are unprofitable) in order to beat out a competitors offer.  It reminded me of the Prisoner's Dilemma theory, and I was doing some online research to see if anyone else had discussed this.  That's why I came upon your article. 
It seems that in acting in what they think is their own self-interest (getting the sale of the vehicle, at all costs) and then with competitors trying to do the same, the profit of a new car dealer has plummeted (zero or negative profit in selling cars, but still profitable in the service, parts, body shop and used car departments). 
 It's gotten to the point where in many cases a dealer is more profitable if the don't sell the car.  Truly a sad state.

I think that this reader raises a number of interesting questions about the car dealership market.  Two immediate questions, for example, are How well aligned are the incentives of the car salespeople, dealership, and the car company? and  Do dealerships sell cars as loss-leaders to make profit on the back end?  From the author of this comment, the answer would seem to be "not very" and "yes."  I also really liked the comment about how Colorado's ban didn't work in a state like Rhode Island because it was so easy to go to an adjacent state.  Very cool.

Aside from that, you might think that there are two other considerations.  On one hand, car dealerships are thought to price discriminate.  Perhaps, they make enough profit on the bad negotiators to offer some screaming deals.  Even better, they might sell a car "below cost" as a loss leader in a different way -- as a way of generating word-of-mouth advertising.  Of course, for this to work, they need to eventually charge someone a mark up.

Either way, the reader raises some interesting questions, and I thought I would share.

Tuesday, January 7, 2014

What does the rise of casinos say about the rest of our economy?

As someone with some research on the casino market, I found today's post by Tim Harford about the Vegas-isation of the economy to be fascinating.  I think the parallels Harford draws are interesting and insightful.  Even if you're not drawn in by casinos, I hope you'll be drawn in by his post.
What if the future of capitalism is not to be found in Shenzhen, Abu Dhabi or the Massachusetts Institute of Technology Media Lab – but in the Nevada desert? Natasha Dow Schüll, an anthropologist, has spent 15 years conducting field research in Las Vegas, culminating in a disturbing book, Addiction by Design. We are used to thinking of Vegas as a city of gaudy spectacle and the green baize of poker, blackjack and roulette tables. It is now a city of slot machines, which have grown like weeds because they are fantastically profitable. And the spread of machine gambling offers a worrisome portent of developments elsewhere in the economy. 
Three slot-machine innovations stand out: first, confusion by design; second, addictiveness by design; third, the use of play money. All have been made possible by the digital automation of the machine itself, which in Las Vegas as elsewhere eliminates the skilled service jobs of croupiers and replaces them with highly paid jobs in interface design and low-paid work as a security guard or waitress.
I have the feeling that Harford views the trend for these market innovations (exploiting confusion, addiction, and play money) as responding to a common shock, possibly technology, or a cultural shift.  That's possible, even plausible, but what if exposure to casinos causes people to take more risks elsewhere, or prefer other products that have casino attributes?  Research by Chi Liao, a Ph.D. student from University of Toronto, suggests that there might be some truth to this claim (paper here).  You might quibble with the details of that paper, but the idea strikes me as plausible and important, given the recent rise of casinos.