This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 17 June 2017.
My hunt for a new car has finally come to an end, after I recently handed a local dealer a cheque only slightly smaller than the annual budget of some African nations. To say that I am relieved that the process is over, is a huge understatement. I find the entire car buying experience to be a thoroughly unenjoyable one. There’s that nagging sense that you’re paying way more than you really should. Also, the uncertainty of whether you’re just going to end up the proud owner of a lemon. Worst of all of course, is the feeling that you need to haggle for the best deal, or else you’re simply a fool who deserves to be taken advantage of. I really don’t want the pressure of having to negotiate the best possible deal, always wondering if you could have paid less. That said, on this particular occasion I was determined to drive a hard bargain – I would be merciless in screwing down the salesman on price. No quarter would be asked, and none would be given. I was brutal in my bargaining tactics and had the salesman practically begging for mercy – at which point I made my demands and watched him cave in and give me a free set of floor mats. My feelings of euphoria in such a fine negotiating victory were only slightly marred by the sound of champagne corks popping in the background as I left the dealership.
The problem with buying a car is the issue of asymmetrical information. This occurs where one party to a transaction (the car salesman in this case), has more or better information than the other (me, the ignorant would-be car buyer). Nobel prize-winning economist George Akerlof highlighted this problem in a 2001 research paper which showed that asymmetric information in the used car market drives down the quality of cars on offer, until all that is for sale are lemons. The same problem of asymmetrical information also exists within the stock market, where parties with varying levels of information trade with each other. In some instances, the seller could be a director who knows that the company is struggling and is looking to offload their shares. Technically this is illegal, but let’s not kid ourselves that it doesn’t happen. In such a scenario, you end up paying more than the shares are worth, while the seller makes an outsized gain. Such an outcome pushes up costs and reduces the overall efficiency of the market. Unfortunately, the issue of asymmetrical information can’t be avoided, it can only be managed through extensive research and due diligence. Something I should have done before handing across my over-sized cheque.