How to use game theory to buy a car • Hacker News Board

Re: How to use game theory to buy a car

#31

Post by gojomo » Tue, Sep 08, 2009, 4:19 AM UTC

steve19 wrote: post #29

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).

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.

Re: How to use game theory to buy a car

#32

Post by kdw » Tue, Sep 08, 2009, 5:53 AM UTC

mwexler wrote: post #23

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 dr…

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.

Re: How to use game theory to buy a car

#33

Post by erikb85 » Tue, Sep 08, 2009, 9:47 AM UTC

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.

Re: How to use game theory to buy a car

#34

Post by ZeroGravitas » Tue, Sep 08, 2009, 11:37 AM UTC

mrkurt wrote: post #22

krschultz wrote: post #11

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…

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 negoti…

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.

Re: How to use game theory to buy a car

#35

Post by timwiseman » Tue, Sep 08, 2009, 1:42 PM UTC

sammyo wrote: post #19

krschultz wrote: post #11

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…

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 mu…

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.

Re: How to use game theory to buy a car

#36

Post by mattcottingham » Tue, Sep 08, 2009, 1:52 PM UTC

steve19 wrote: post #29

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).

"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.

Re: How to use game theory to buy a car

#37

Post by ajuc » Tue, Sep 08, 2009, 2:10 PM UTC

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.

Re: How to use game theory to buy a car

#38

Post by krschultz » Tue, Sep 08, 2009, 5:30 PM UTC

ryanwaggoner wrote: post #30

krschultz wrote: post #28

Earlier quoted context omitted.

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 ba…

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?

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.

Re: How to use game theory to buy a car

#39

Post by mrkurt » Tue, Sep 08, 2009, 5:43 PM UTC

krschultz wrote: post #38

ryanwaggoner wrote: post #30

Earlier quoted context omitted.

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?

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.

Re: How to use game theory to buy a car

#40

Post by mrkurt » Tue, Sep 08, 2009, 5:45 PM UTC

krschultz wrote: post #28

mrkurt wrote: post #22

Earlier quoted context omitted.

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 negoti…

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 ba…

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.