I Recently Bought A New Car

Dad next to a mini cooper, NOT what we ended up buying

Well, it’s new to me, but it has had at least two previous owners and one leasing company has cast its ominous shadow over the documents. But somehow saying ‘i recently bought a used car’ doesn’t quite bring it, you know?

In the process, me and my dad (who helped) did a reasonable amount of price gauging, which generally meant studying classifieds, calling around and making test offers; quality checking: going around and testing vehicles out and judging them against price quotations, looking screwy eyed at sellers trying to make out hidden agendas; research: grilling mechanics, friends, bystanders and paranoid neighbors and anyone else who we suspected of having a modicum of knowledge about our target model.

Like any used car market, Sri Lanka’s has no shortage of lemons. It’s a jungle out there and information is highly asymmetric, which is a fancy way of saying that the sellers have all the knowledge. For that reason we steered clear of car salesmen. They have a reputation for ‘dressing up’ and palming off vehicles that will end up giving a lot of trouble, at exorbitant prices as well. Not all car salesmen are bad salesmen, but they are victims of the same same market law that plague all informationally assymetric markets; “The bad drives out the good”.

Admittedly worries about quality decrease as the car reduces in age. The newer the car is and the better the ownership record, the easier it is to trust what the seller is telling you.

Buying decisions center around two areas when it comes to cars. On the stochastic side, or the part of the decision that considers the actual car itself, things like brand, country of origin, parts availability, options (such as AC, power steering etc), durability, fuel consumption and commonness play a big role. Toyotas are top dog and can boast of being almost liquid assets, bought dear but sold quickly and often at a profit. Nissan and other Japanese brands come next with some exceptions like Subaru. Indian cars are slowly gaining recognition as well. I hope so, I ended up buying one.

But the biggest worrier for any buyer in the used car market is level of maintenance. The quality of the car ultimately depends on how it has been used, whether it has been serviced on time and if it has been ‘hacked’ or not. Buyers analyze potential buys by looking at mileage, wear and tear and general drive quality. But who are we kidding? These are used cars. Damages can easily be covered up so generally a buyer will take an experienced mechanic to check the car out and give the go ahead.

Economists have been all over the used car market. Like the insurance market, it’s a classic example of information asymmetry. An economist called George Akerlof said that since used cars enter the market after years of wear and tear due to many factors like the style of driving and general maintenance, buyers can’t conclude if the car is of superior quality or not. The safest bet then is to assume that car is of average quality, and pay an average price for it.

This means that sellers of used cars in top condition will not want to sell it because they won’t get the price they want. So top quality cars will be removed, reducing the average quality of the used cars in the market, causing buyers to drive prices down even further. This vicious cycle is described by Gresham’s law; which states that ‘the bad drives out the good’ (I’d like to apply this to our country’s political sphere and see what comes up sometime).

This uncertainty of quality levels leads to a long drawn out buying process, lasting sometimes for weeks. A buyer will ‘stalk’ the market until he is satisfied that he has obtained a reasonable amount of information to proceed with a purchase. Only then will he proceed to make serious offers.

Interestingly, buyers and sellers are interchangeable. Today’s buyer is tomorrow’s seller. So experienced buyers and sellers will both think they know how the other’s mind will work, and will try to second guess their moves. Sellers will generally price the vehicle at a premium and will then reduce reluctantly based on the offers that come in.

Sellers might be usually painted the bad guys here, but really everyone involved is doing some skullduggery of the other. If you’re a noob looking to buy his first car, take my advice and look beyond the shiny paint and body kit and consult someone with experience.

    • Whacko said:

      get a dictionary :p

  1. Dulan said:

    So what do you think can be done about the asymmetry of information? There’s plenty of talk on the forums at Autolanka.com, but I think there’s little indication of what realistic prices are.

    When buying a car last October, I had a bigger budget than before, thanks to a new job. But had I been looking for a car in the second hand market, I’d just be in it and asking myself constantly “is it worth it?”. Anyone who bought their small Indian cars before 2009 got screwed when the resale value dropped, but I hear it’s gone up again due to the taxes. And since it’s impossible to buy a new car for anything less than 2 million (excepting the smaller ones) the prices for older cars just stayed the same. I mean, a Toyota Corolla 110 is generally quoted at a round 16lakhs, while a Starlet can command 13lakhs. For a car that is almost 12-15 years old.

    Hope you got a good deal!

    • Whacko said:

      Yeah you’re right. The starlet is exorbitantly priced. I was thinking of one until i realized i better aim lower. The deal i got was reasonable as per current market prices. But i do think they are bloated a little because of low interest rates and the removal of taxes.

      People are anticipating further restrictions like the reduction in the usage levels of reconditioned cars, this might drive prices even higher. The best thing we can do about information assymetry is i suppose try to get as much information as we can.

      BUt the thing with buying a car is that its mostly an immediate need. So buyers tend to buy now even though they may feel that prices have a chance of coming down three months in the future, say.

  2. I still can’t understand the ‘economics’ of second hand car market..

    We give too much value to piece of junk!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: