Nation of Beancounters

How to bargain if you’re handicapped

Posted in Imperfect Information Problem by Navin Kumar on March 3, 2012

…one field experiment examined discrimination against disabled people in the context of car repairs, finding that disabled customers received higher quotes than the non-disabled customers. To get at the nature of this discrimination, the authors first conducted a survey, which revealed that “mechanics believe the disabled approach 1.85 body shops for price quotes while the non-disabled approach 2.85.”  In a second field experiment, the authors instructed participants to say the phrase, “I’m getting a few price quotes.”  This significantly changed outcomes — disabled participants received much lower offers: “Importantly, the lower offers received by disabled testers after signaling a willingness to search are not statistically different from those received by the abled,” write the authors. “In fact, the disabled now receive slightly lower price quotes.”

From Freakonomics.

The reason that disabled people get higher quotes is because all firms have – in a very narrow sense – “monopoly power”. In order to get another quote, the customer would have to physically travel to another repair store, probably far away. Disabled people face higher costs getting quotes than normal people and so the degree of monopoly power is greater. But by declaring that you’re merely “getting quotes”, you’re signalling the fact that you’ll be visiting the competition, dramatically reducing the monopoly power that firms have.

Lessons: competition is important; market bottlenecks are everywhere; signaling is important.

Another lesson arises: non-credible signals matter. Economists tend to emphasize that how credible a signal is more important than the signal. You say you’ll nuke the USSR if they enter Afghanistan – but would you really? Unless you can credibly commit to a mechanism to do so, you won’t be taken seriously. But here, even though the repairmen know that it’s costly for the disabled to go to the competition, the statement works. (There’s probably something Bayesian going on: this chap might price-compare or might not. Let me act like the probability is 50-50. Wait – did he just say that would? Better revise probabilities to 90% going -10% not.)

Sometimes people don’t price-shop because they slip up and get lazy without realizing it. Being aware that one ought is a powerful motivator.

Advertisements

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 )

Twitter picture

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

Facebook photo

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

Google+ photo

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

Connecting to %s

%d bloggers like this: