Thursday, April 11, 2013

Car Pricing Strategies

In the United States, most retailing purchases are done completed using a "no-haggle" pricing strategy.  So when I purchase a cup of coffee - I do not haggle or bargain with the barista over the price I am going to pay.  There is a posted price and that is the price for the cup of coffee.  This would be an example of uniform pricing - each consumer pays the same price for the same good.

Not so when buying an car.  There the consumer typically bargains over the final price, and those who are better at bargaining will get the better deal.  Now The New York Times reports that there is a website that wants to end car buying haggling and go to a guaranteed pricing (think uniform price) for buying automobiles.  Automobile dealerships are not in favor of this option.

Let's use the pricing ideas from microeconomics to see what impact this will have on the buyer and the seller.  Moving from a price discrimination (or variable pricing model) can lower the revenues and profits of the dealers and also lower the number of cars sold (by savy car buying hagglers).  All of this reduces producer economic well being.  Buyers on the other hand will be better off (if the average haggle price is higher than the uniform price) in terms of economic well being.

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