Tuesday, June 10, 2008

Confessions of a car dealer

Ever wonder what's behind the horrible experience of buying a car at a dealership? What the negotiation looks like from the other side?

There's a great podcast up on Econtalk, in which Russ Roberts (econ prof at George Mason) interviews a sales manager at a Honda dealership. Did you know that everyone working on the sales side, including the manager, is on 100% commission-based compensation? The average amount earned by the salesman on the sale of a new car is about $350. Check out the comments as well.

The sales manager adopts a stubbornly behavioral position for why prices of cars are not set in a more transparent manner -- that we are culturally conditioned to haggle over car prices. In the comments several more traditional economic (game or information theoretic) arguments are proposed. How does it work in other countries? Are Japanese car salesmen just like their American counterparts?


Anonymous said...

Some Quaker businessmen got very wealthy in England in 17th century, because they thought there was a divinely correct price: what your materials cost, plus a certain reasonable amount for your time. And they gave this price to everyone. This meant you could send your kid to buy, or your maid, and not get screwed. You didn't get the best price, the one you would get from a screaming bargaining session where you moved the seller down to his undershorts, but you got a fair deal. Suddenly, lots of people bought from the Quakers. Many other business people were forced into fixed prices. dave.s.

Steve Hsu said...

But would it work for cars? Would the additional trust and new business it drives to the fixed-price dealer compensate for the money that he could have otherwise extracted from less sophisticated buyers?

I thought Saturn may have tried this, but perhaps without success. I'm surprised Russ didn't research it a bit more before/after the interview.

Anonymous said...

I read this pretty good article about car salesmen a while back.
It's long, though, so here's the supposed explanation for car selling practices:
During the sales seminar I took, the instructor attempted to tackle the "Why is it this way?" question. He said that just after World War II there were a lot of people who wanted to buy cars, and there were a lot of people who had money, but there weren't enough cars to go around. So the car salesman didn't really have to "sell." Their job was merely to qualify customers, to find out who was really going to "buy today," so they could move on to the next customer. This set the tone for the business and it is still that way today.

used car dealer said...

I don't know about you. But being a car dealer is a really difficult job, all the bargaining, dealing with customers and all that.

Berneo Alex said...

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