How to use game theory to buy a car(timesonline.typepad.com)
timesonline.typepad.com
How to use game theory to buy a car
http://timesonline.typepad.com/comment/2009/09/how-to-use-game-theory-to-buy-a-car.html
39 comments
It's interesting that you mentioned your prices in monthly payments, rather than the pre-financed total. What precisely were you negotiating?
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....
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....
I was negotiating the total price of the car. I guess the missing bit of information is the term (both prices were the same) and the amount down (both were $0). That wouldn't always be the case if the dealer is trying to pull a fast one on you by giving you a lower monthly payment but a higher total payment. I made sure to match apples to apples. I assume most people reading this website would realize the possible bait and switch.
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.
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.
I was negotiating the total price of the car. I guess the missing bit of information is the term (both prices were the same) and the amount down (both were $0)....I also don't really finance.
Huh? If you don't finance and both of the cars were the same price, how does the difference in term mean anything?
Huh? If you don't finance and both of the cars were the same price, how does the difference in term mean anything?
Sorry, what I meant to say was that the term was constant across both, and the monthly payment varied. So you can compare the monthly payments as a proportional representation of the total price. Where as the other commenter implied I got hoodwinked when the dealer lowered my monthly payment by lengthening the term.
Oh, I wasn't trying to imply that. I was just curious how you'd negotiated. People often "lose" when they're negotiating a monthly price versus walking into a dealership having already shopped for financing, and then negotiating a cash purchase price.
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.
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 are fantastic if you get them from the manufacturer. I would recommend looking into those if you're ever shopping for a used car that's at or near the end of standard warranty.
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.
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.
Thank you for that link. One of the most informative reads of my life, and timely too. My lease runs out in a few months, and now I feel sorry for any dealership that I walk into.
You should sumbit that link on its own.
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.
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.
It certainly is a game. It's an attempt to construct a game of 20 participants bidding on a scarce resource (you, the buyer) with specific rules. And would likely work, unless say, a few buddies happened to chat over beers and the subject of 'that crazy guy on the phone' comes up. The element of scarce information will then break some of the 'rules', negating much if any of hoped for strategy.
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.
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.
And would likely work, unless say, a few buddies happened to chat over beers and the subject of 'that crazy guy on the phone' comes up. The element of scarce information will then break some of the 'rules', negating much if any of hoped for strategy.
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.
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.
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A nice theory, but has it been tested? It assumes rational behavior on the part of the salesperson, not to mention assumes that the writer understands the motivations of the salesperson.
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.
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.
I worked at a dealership for a while so I got to see how things work from the inside. There are tons of different factors. On new cars the auto makers offer various incentives or specials to dealers that might allow the sales person to go lower on Thursday than they would on Monday. It also helps if you're flexible. If you don't mind waiting a week to pickup the car or can take it in a different color you're making the sales person's life easier and they'll usually give you a break. If you're really picky and demanding they really don't care if you go to another dealership so they won't offer you much of a deal.
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.
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.
I've bought our last two vehicles using a similar method. Most dealers have "internet sales managers" who are salespeople trusted enough by management to quote prices without first asking their bosses. It's not that hard. What was interesting was that one dealer's price was so low that competing salespeople said, "You should go buy that!" Something must have been different about that dealer's incentives -- perhaps they were under pressure from their lender to reduce inventories or something. I'll never know, but the vehicle was about $1K less than anyone else's offer.
A nice theory, but has it been tested?
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.
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.
No, the article claims that this is some special game theory and that there are only 21 actors (you and the twenty salespeople). Modeling this in terms of S&D would take into account all potential purchasers.
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.
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.
I always find these things funny, because there is a belief that all dealerships are the same (that is, the variable is simply the price of the car.) It turns out that dealership location is a HUGE variable driving both pricing and decision to buy. Some people need a car sooner than others; the dealership with inventory is more attractive. The one close to your house or work allows you to get service and still get driven to your destination; buying from a dealership 100 miles away, even with the best price, may not help if you need service that only the dealer can provide (either free or something a local shop can't do).
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.
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.
I bought my car from a local dealer for a price that allowed them some profit not because I care deeply about "free oil changes", etc., but because I care about them staying in business.
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.
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.
Regarding the advice on buying a car, it seems like a condensed version from the Motley Fool's Guide to buying a car, in the section titled "The Art of the Deal":
http://www.fool.com/car/car12.htm
http://www.fool.com/car/car12.htm
One of the things I remember from taking game theory at college was that getting a good deal on a used car is near impossible.
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).
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).
getting a good deal on a used car is near impossible
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.
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.
"superficial inspection"
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.
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.
I was buing computer a few years ago (was a student then, so money/time coefficient was a lot bigger :)) , and tried to make it likewise - I've choosed components and went to trip over all computer shops near my flat.
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.
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.
The author mentions South Korea and its foreign policy several times. I would prefer to know more about (and attempt to predict) the foreign policy of North Korea over South, because of its closed-off nature.
Did anyone else think that the author meant North Korea?
Did anyone else think that the author meant North Korea?
Well - south korea does make and export an awful lot of cars.
"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.
"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.
An oldie but goodie.
Corollary #1: Do the same thing, but everything in writing.
Corollary #2: Set up a leasing company and put Corollary #1 on your letterhead.
Corollary #1: Do the same thing, but everything in writing.
Corollary #2: Set up a leasing company and put Corollary #1 on your letterhead.
consumerreports.org
I think game theory is about coming from a disadvantage (the dealer knows everything about cars and getting the maximum from you) and getting a fair deal in the end, or having the advantage and getting the maximum possible. But the shown solution here, just changes the situation about information and leverage. Yes, everytime you have a disadvantage and put energy in changing to an advantageous situation, then you are in a better situation and get more out of a deal...
No, I am not worried about learning nothing out of this post. I am worried about the author. He just so much does not get the point. When I use mathematics to deal with the car dealer, my intention is NOT to get the information, NOT to gain leverage through dealing skills. I want to use my logical knowledge and skills to change the game from "best dealer wins" to "most logical wins".
It is really good to learn something about leverage. That is very nessesary for everybodies life, especially for us geeks, who are not naturally gifted in this area. But mathematics, too, is a strong tool, with different rules and different advantages. Please look deeper in this matter, too. There could be a real advantage for you over car dealers, who have mostly no scientific background.
I will not read this - but here is what I do:
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.
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.
>Figure out the lowest price they can sell at
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?
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?
If you're not going to read the five-minute-long article, why bother posting?
Always buy rustproofing, if you bought a car crappy enough that the paint job doesn't include anti-rust elements, especially if you live in a location with lots of water-based weather or near the coast.
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%.
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%.
ah, but never buy rustproofing (or optional alarm, tint, etc.) from the dealer! those are the optional extras that are marked up 200-500%. there are specialty shops that will do the same exact thing for much cheaper.
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.
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.
There was for a time a program on UK TV (BBC) called something like "Don't get done, get Dom!". They'd use an earpiece to send people in to buy cars, he'd be listening via hidden mic and would tell them what to say / do. He was awesome.
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?
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?
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.