

How to use game theory to buy a car - ca98am79
http://timesonline.typepad.com/comment/2009/09/how-to-use-game-theory-to-buy-a-car.html

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krschultz
This is practically verbatim copied from "The Millionaire Next Door".
Additionally it really has nothing to do with Game Theory, just common sense
negotiating. And you can improve on their play by A LOT.

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.

~~~
mrkurt
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....](http://www.edmunds.com/advice/buying/articles/42962/article.html)

~~~
krschultz
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.

~~~
ryanwaggoner
_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?

~~~
krschultz
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.

~~~
mrkurt
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.

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tonystubblebine
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.

~~~
edw519
_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.

~~~
tonystubblebine
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.

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mwexler
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.

~~~
kdw
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.

------
felideon
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>

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steve19
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).

~~~
gojomo
_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.

------
ajuc
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.

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superjared
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?

~~~
whatusername
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.

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baddox
Is anyone else unable to go to this page in Chrome because it issues a bunch
of Adobe errors? I'm using the latest dev build.

~~~
dkokelley
I went in Chrome no problem. (Version 2.0.172.43)

------
brooksbp
consumerreports.org

------
edw519
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.

------
erikb85
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.

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BobCat
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.

~~~
fatdog789
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%.

~~~
cheez80
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.

~~~
pbhjpbhj
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?

