Putting Car Dealers on the Spot
Bruce Bueno de Mesquita, a political scientist who teaches at New York University, explains in this video how to use game theory to your advantage in your attempt to procure the best price for your next car purchase. The method he proposes goes as follows: you call multiple car dealers that are within your predetermined distance and tell them that you are purchasing the car you want at so and so time. You tell the dealer that you will buy from the dealer who offers the best deal and then proceed to ask what they are willing to offer. Bueno de Mesquita explains that the dealer will most likely then respond with “ ‘You can’t buy a car on the telephone.’ ” You then politely disagree with that statement and convey to the dealer that by not quoting a price, that means that this specific dealer won’t be able to offer the best deal to you. Not surprisingly, the dealer may also realize that his/her offer could be used against him/her because you can tell another dealer what your current best offer is. You then reassure the dealer that you will go to the dealer with the lowest price, with no negotiations of price when you walk into their office. If the dealer is not cooperative, you will accept the next best offer. You end the phone call by asking once again what price the dealer is willing to offer to you.
This situation can be paralleled to a first-price sealed-bid auction. The circumstances vary a little though from the general version of this auction. Even though the dealer sells the car to you, in this case the dealers act as the bidders and you act as the “seller”. One can see this as “selling” your business to the dealer, but let’s not get too bogged down on these terminologies. Another difference is that the winner of the auction is the bidder who bids the lowest and not the highest price. Therefore, the payoff is no longer the value minus the bid, but the bid minus the value. Just as in a normal first-price sealed-bid auction, the bidders must weigh the value of the car (not the price you see but the value of the car for the dealer) and their bid. In this case, if the dealer bids a lower price, the chance of you buying the car from them increases, but the dealer’s payoff decreases.
First, we can assume that the dealers will not offer a price below the value they place on the car because then they would be losing money. Therefore, as long as they bid a price above the value of the car, the dealer will make some sort of profit. That means that there is an incentive to offer a good price because if you decide to buy the car from them, then they will make some profit. How much profit they gain though is dependent on their bid. Since the dealers know you are talking to other dealers and they have no knowledge of the other dealers’ bids, it is more likely that the dealers will drop their prices by a greater amount in hopes of securing your business. So instead of you trying to compromise with the car dealer on a price between the two of you, the dealers compete for your business and the chances of you getting a better deal are higher.
http://articles.businessinsider.com/2012-04-03/wall_street/31279872_1_car-dealer-car-purchase-price
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