Why we prefer to buy from the showroom :: Business Line

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We often regret decisions we make. Like my friend who bought a car and a month later decided that he wasn't satisfied with it. He promptly placed the car on sale and was shocked to find that the buyers wanted 15 per cent discount on the showroom price! Why did buyers want a steep discount on a car that had not even clocked 500 kilometres?

SECOND-HAND SALES

Suppose you want to buy a pre-owned car. And you find my friend's car on sale. The first thought that comes to your mind is: Did the car meet with an accident? You do not find any obvious damages on inspection. But you find it difficult to accept the seller's explanation for selling the car. He quotes Rs 6.5 lakh for a car that retails at Rs 6.75 lakh. You quote Rs 5.75 lakh. You argue that is attractive to buy a new car at full price than pay Rs 0.25 lakh less for a pre-owned car. After all, as a second owner, the car will fetch a lower price when you resell it later. In essence, it is the lack of information that prompts the buyer to quote a lower price (economists call it asymmetric information).

DAMAGE CONTROL

But what if the seller is honest and mentions that the car met with an accident? Then, you would, perhaps, ask for 30-40 per cent discount. You now have information about the car's quality. And nobody prefers to buy a car with some record unless the price is very attractive. You will, hence, go to another seller whose car may or may not have a problem. You are better off doing so because a known problem with the first seller is worse than a possibility of a problem with the other seller!

So, sellers typically do not disclose obvious information that could reduce their car's price. And that makes buyers suspicious of all pre-owned cars, prompting them to demand a discount - even if the car is just out of the showroom