Auto Purchase (2)

When I said we were "back to the beginning" in the last post, it was not entirely true - at least we knew we are not buying Prius, and Camry is no longer a competitive candidate on our list. A further discussion concluded that Honda Civic is too compact and so is Corolla.

Later on I asked for quotes on Honda Accord Auto through Carwoo.com and received 4 different quotes from Honda dealers in the bay area, most of which are $1,000-2,000 above our budget. Then the negotiation started - how I wish I had taken that class at Princeton! I told dealers the price I'm willing to pay, and most of them believed I'm joking, while I considered the real joke is the over-profitable dealership. Anyway, none of the bargain led anywhere. And obviously the auto demand in the bay area is pretty high and inelastic, as very little concession was made by the dealers in the end. The price was still high.

Sometimes I can't help thinking that theoretically the Honda dealership market should be very competitive - many rivals, identical products and low entry barriers. However I am very surprised to see the price for the same Honda Accord can be 800 dollars higher in another dealership only 5 miles away. I believe all the dealers do know the prices offered by their rivals - you can get all this information from auto-purchase websites like truecar.com for free, thus the price should be set by the lowest one, as most economic models have predicted.

But dealers have good reasons not to match the lowest price, and one of the reasons is information asymmetry. Information is valuable. In this case, the value is a few thousands of dollars. Because not all the information on auto price is transparent, consumers need to find out the lowest price in the area through online search or from their family and friends. Research has to be done and it takes time. Therefore consumers need to calculate their opportunity cost of spending time on the research. If the opportunity cost over weighs the savings he/she can get by doing research, the rational choice is to go and randomly pick a dealer, and buy the car. In a rich place like the bay area, where people spend millions on housing, I'm sure some residents will save money by not shopping around.

Consumer surplus could be another reason. When consumers'expectations are anchored to a ridiculously high price, it's more likely for them to accept a high price. While if consumers are notified of a reasonable price at the start, their bargaining may drive the price much lower. Thus, consumer surplus shall be much larger if consumers are offered a high price, which is driven down later.

All this said, we're still in the middle of nowhere to purchase a new car. I wish I could just throw my econ book at dealer's face and tell them that they shouldn't price in this way, and bargaining doesn't make any economic sense as it only increases transaction cost. Unfortunately I don't think they will agree with me and make joint efforts to find a Paleto Optimal. Anyway, I will continue with my joyful car purchasing process, and try to put our old Nissan into retirement as soon as possible.