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Haggling

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Thursday, Oct 25, 2007

In BusinessWeek (which you may not recognize since its strange retro redesign) is an article about auto dealerships moving toward a “one-price” system, meaning the price the salesperson quotes you is actually what they intend to sell the car for, rather than being merely the opening act in a negotiation melodrama that will be followed by hard-sell histrionics, faked meetings with managers, some good cop/bad cop, and finally a deus ex machina deal. According to the auto dealerships, which create the bulk of their margins by mystifying the base price and burying its customers in bullshit, some people actually preferred the old system: “Dealers experimented with this before during the 1990s, only to be deluged with complaints from traditionalists who felt they weren’t getting a good deal unless they had the satisfaction of seeing a salesman cut the price right before their eyes.” I’d hazard that these “traditionalists” were so accustomed to distrusting car salesmen that they wouldn’t accept that a given price from a salesman was anything but a ripoff. No one can possible prefer a system where pricing is more opaque—car sales is the classic example of asymmetrical information distorting the market. If the salesman can assure that he always knows more than the customer, he can always work to maximize the rip-off. Or to translate into economic terminology, the salesman can make sure price discrimination works with maximum efficiency and buyers pay as much as they are willing to, not as little as the salesperson will accept. The haggling scheme is great for customers who can bargain on a fair playing field, as perhaps they might have been back when the deals were for horses and not theoretically identical machines. You could look in the animal’s eyes and into its mouth (unless of course it was a gift horse), get a sense of its spirit, get a feel for how it would hunt. For men in Trollope novels at least, this is an essential skill, a way to demonstrate one’s savvy, one’s practical worldliness. (This in no way justifies Trollope’s interminable fox-hunting sequences.) Some of this may have survived into car negotiations, as the article’s author suggests, but that was long ago, before it became apparent that the situations weren’t analogous.


Americans may have become too passive of shoppers to tolerate much haggling, which ceased to be a meaningful part of our culture early in the 20th century, when department stores lured customers with promises of haggle-free purchasing. This expectations has made prices much more sticky—they can’t adapt to inflation and to fluctuations in the values of currencies. Canadians are being punished by sticky prices right now— to cross the bridge to Niagara Falls costs you $2.00 American and $2.50 Canadian, even though the dollars have recently achieved parity. When you are talking about a few cents per unit here or there, sticky prices don’t seem too big a deal, but car dealers are faced with losing more like hundreds of dollars per sale at least, most of which probably hits the commission-earning salesman’s paycheck. But there is considerable psychological comfort in fixed prices, because you don’t have to feel like someone else got a better deal than you and your rights as a consumer-citizen were somehow grossly violated.

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