August 27, 2004

The Art of the (Illusion of a) Deal

by PG

Reuters reports that a Nissan dealership over in Jersey is running an Extra Special deal -- buy any new model, get a 2003 Sentra free. This is a new spin on the seemingly extravagant sales and discounts automakers have been advertising since the recession was exacerbated by 9/11.

However, an anecdote from one professor made me wonder whether we really are getting such great deals. He recounted a time when he was in practice, and a senior member of his firm was giving an ultimatum to a client. The client had gotten into trouble for advertising women's pantyhose as being on sale. A sale, in usual parlance, means that there has been a reduction from the "normal" price. In this case, though, the "normal" price applied only on one day of the year. The FTC called foul, and the client immediately set his mind to devising an alternative scheme with similar chicanery. His lawyer firmly told him that if he pulled a stunt like that again, the firm would resign as counsel.

The professor didn't mention whether the client was sufficiently impressed by this to start behaving properly, but that wasn't the moral of the story; the moral was, Be an ethical lawyer who does not stand by while your client engages in more crooked and criminal actions.

But this news story inspires a different query: what makes us perceive something to be a bargain, and is it affected more by the item's past prices and the prices of competitors, or by our own sense of what something is worth?

For example, when I started shopping for a car a few years ago, I knew that I wanted a Civic hybrid. (I really wanted a Mini, but it was too cool for me to be driving.) I test-drove the Civic at a dealership in a small Texas town, where it was in my preferred color and the saleswoman practically begged me to take it off her hands, offering an out-the-door price of $19,000 (and all hybrids have a $2000 federal tax deduction) before we could even bargain with her. Unfortunately, I was moving to Northern Virginia, so I called around to dealers in that area. All had lengthy waiting lists, and the car -- in white, pah! -- eventually came from a dealership a hundred miles from where I would live, at $21,000.

Ever since, I've been convinced that I got a bad deal on the car. But maybe I didn't. The actual price wasn't more than I could afford, and so far it's been a good little hybrid, if not quite as fuel efficient as the EPA may think. On the flipside, maybe the Nissan deal isn't that great. If they can afford to have 2-for-1 sales without going bankrupt or firing employees, why haven't they done so until now?

I don't have a substantive conclusion to this line of thought. But in some ways, our system's reliance on competition to keep prices at some ideal level has distorted or disabled our capacity to understand what really makes for a good deal. Car being sold for $2000 more in one place than in another? Must have been cheated. Cars sold 2-for-1? Must be getting a steal.

This may even tie into the consumer culture; if you buy things based on their relative-to-competitors price, rather than relative to your own sense of their worth, you're likely to be consuming more than you genuinely need or enjoy. I know that I've been sufficiently brainwashed that I feel guilty when I don't check on a sale, even if I don't need anything at the time. Sure, I'm getting great deals, but there's a good chance that I don't really want them.

August 27, 2004 01:50 PM | TrackBack

Your story about the "sale" of pantyhose reminds me somewhat of the television shopping networks that promote anniversary sale prices whenever I am flipping through the channels. The network has to come up with some anniversary that has something to do with the goods being sold, so that the "discount" can be advertised. Also funny is when those shows sell items like pre-made macaroni and cheese, and people buy it---but I guess that is another story.

Posted by: Sean S at August 27, 2004 02:59 PM

I recall in the late 1950s and 1960s, when the FTC was really protecting consumers, the use of the word "free" in an ad was strongly frowned upon if the consumer had to buy something to get something "free". So this resulted in replacing "free" with "at no additional charge". But that was then. Now, the word "free" is freely used in ads even though the item cannot be obtained without some payment.

Posted by: Shag from Brookline at August 28, 2004 06:50 AM
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