More Thoughts On Selling Cars

I would like to take one more pass at the car dealer study, because I think it raises a few, additional, interesting questions.

    The study is described in Ian Ayres’ Pervasive Prejudice?: Non-Traditional Evidence of Race and Gender Discrimination , which is a book that had a great deal of influence on my thinking when I was writing “Blink.” Ayres’ project in the book is in exploring non-traditional sources of discrimination—that is, the discrimination that persists because of some flaw or condition of the marketplace in which it is operating.

    For example, Ayres points out that McDonald’s can’t charge Hispanics more for hamburgers than white people—even if they thought that Hispanics would be willing to pay more for hamburgers—because a Hispanic standing in line behind a white person would quickly discover what was going on.  Transparency is the great antidote to discriminatory behavior. So is competition. This was Gary Becker’s argument. If a fast food restaurant tries to over-charge Hispanics, then another restaurant can open next door, and make a lot of money treating Hispanics properly. Once again, knowledge about an offending behavior has the effect of correcting the wrong.

     But are there cases, Ayres wondered, where there isn’t enough transparency and competition to correct discrimination? If I don’t know I’m being treated differently, for instance, I have no incentive to take my business elsewhere. The literature showing how much longer black men wait for taxi cabs falls into this category. It’s hard for a black man to figure out, exactly, how differently he’s being treated, and if he does, he has limited opportunity to take his business elsewhere because (at least in New York City) the number of taxicab licenses is limited by law.

     This is the context for Ayres’ study of car salesmen. Cars are high-ticket items with an awful lot of discretion built into their price—and because of a variety of cultural and historical quirks in the car marketplace there isn’t a lot of freely available information about who paid what for what. (Imagine, for example, if we bought cars the same way we bought real estate. You would ask the salesman about the Passat, with the sport package and the leather interior, and the salesman would give you “comparables” for every Passat sold in the United States in the past six months with the sport package and the leather interior. End of story. But for the inability of car dealers to join the 21st century, we wouldn’t be having this discussion about price discrimination).

     So Ayres sent a group of black and white men and women, with identical cover stories, to hundreds of car dealerships around Chicago. Then he noted the opening prices quoted by salesmen to each gender and racial group. He wanted to create some “comparables” for the purposes of measuring price discrimination. And lo and behold he finds that black men are quoted prices about $1000, on average, higher than white men.

     My initial response to that study was simple: it’s wrong to try and charge someone more for something because of his or her gender and skin color. Reading the comments to my earlier posts, I was somewhat surprised to learn that for some people that is a controversial position. I’m guessing a lot of those who are indifferent to this kind of price discrimination are not black males. Oh well.

     So let’s move on. A good deal of the commenters made the point that the behavior of the car salesmen was rational. This was the position of Judge Richard Posner, who gave “Blink” a spanking, when he reviewed it in the New Republic two years ago. Posner wrote:

It would not occur to Gladwell, a good liberal, that an auto salesman's discriminating on the basis of race or sex might be a rational form of the "rapid cognition" that he admires. If two groups happen to differ on average, even though there is considerable overlap between the groups, it may be sensible to ascribe the group's average characteristics to each member of the group, even though one knows that many members deviate from the average. An individual's characteristics may be difficult to determine in a brief encounter, and a salesman cannot afford to waste his time in a protracted one, and so he may quote a high price to every black shopper even though he knows that some blacks are just as shrewd and experienced car shoppers as the average white, or more so. Economists use the term "statistical discrimination" to describe this behavior

     I am not one, ordinarily, to take issue with Judge Posner, who knows a great deal more about economics—and most everything, I suspect (except maybe the Buffalo Bills)—than me. But let’s take a little closer look at this idea: is it really in the economic self-interest--is it really rational-- of car salesmen to draw inferences about individual car-buyers from the group to which those car buyers belong? 

     When I was reporting Blink, I talked to a number of car salesmen about this very question. They were all top salesmen—99th percentile—since it struck me that it wouldn’t be terribly useful to quiz mediocre salesmen about their strategies. (One of the salesmen I interviewed, Bob Golomb is quoted extensively in the book). They told me three things.

     First, that one of the things you quickly learn, in selling cars, is that your ability to draw inferences about individuals’ buying preferences based on  surface characteristics of race, gender, dress, age, hairstyle or manner isn’t nearly as good as you think it is. This is why I put the car salesmen material in the part of Blink devoted to the failures of rapid cognition. What I heard, over and over again, was that what a good salesman can do is draw useful inferences about an individual’s personality—that is, are they nervous? Do they need their hand held? Are they best given time and space?—and come up with better ways, as a result, of giving the customer the kind of help he or she needs. But drawing accurate inferences about an individual’s likelihood to buy is a completely different—and vastly more complicated--matter.

     Second, that price discrimination—quoting a higher price to one customer more than another—is a risky strategy, because if it backfires you lose the sale. If you quote a black man a price $1000 higher than you quote a white man—all things being equal—the black man may be less inclined to buy the car. Cars are not, after all, price inelastic goods.

    And three—building on point two—that the incentive structure of car salesmen, in recent years, has changed. It used to be the case that a salesman made his money on the profit margin of each car he sold—so the more above invoice the customer paid, the more the salesman took home in commission. Increasingly, though, the real money in selling cars, I was told, was in meeting and exceeding certain manufacturer sales quotas. You are better off, in other words, selling lots of cars at a low profit margin than a few cars at a high profit margin.

     The point is this. Even if you don’t agree that price discrimination on the basis of race and gender is reprehensible, I think you should at least consider the possibility that it’s a bad business strategy. 

Comments

[Sweetness]

Kudos to Gladwell for reading and responding to the many comments on his blog, and for conceding that whether or not price discrimination is "wrong" has little to do with economic analysis.

But if what we're talking about were a bad business strategy, wouldn't the market drive it out in favor of better strategies? If not, why not?

[Boing]

Uh, ok. Then wouldn't the marketplace weed out those salesmen who do it? The car dealerships know their revenue and profit down to the penny. The fact that these tactics remain indicate that SOMEONE must think its a good strategy.

You seem to have abandoned the line of reasoning that says everyone needs to be "shocked, shocked" that car salesmen are scum. Now you're moving on to a plaintive "Why, oh why, are car salesmen scum? Why does the market reward their scummy tactics?"

Life is full of sadness, sometimes. Not saying its right, not saying it should continue, but given the amount of variables involved, and the difficulty of "proving" such bias in a court of law, this may be one injustice that never goes remedied. I don't see how you legislate a solution that isn't overly burdensome.

[malcolm gladwell]

Interesting question. Well, the argument in Blink was that, in fact, the market does punish those who practice this kind of irrational price discrimination, since the top-grossing salesmen (the ones that I spoke to anyway) all seemed to make an explicit attempt to treat all customers the same, in order to maximize sales volume.

[Sweetness]

I wonder if the top salesmen were being honest when they described their behavior. Maybe not, since what they said is so different from what Ayres found. The incentive to be untruthful is that they don't want to look immoral or bigoted. I would bet that car salesmen are probably a little sensitive about their image...

[Reale]

Too little Sailer in this post. I'm disappointed.

[DC]

I loved this post, far more than the most recent Sailer related entries. Like most people here, I had never heard of him until the spat on this blog, and admit I spent some time looking at his site. In my opinion, his main problem is that he's a poor writer - whether intentional or not, his writing comes across as personal invective, so whatever points he has to make get lost in that, and tends to drag responders through the mud-slinging style as well.

But amidst that unfortunate writing style and some ridiculous arguments are a few good questions worth addressing. And I think, ignoring the "enjoying being seen as big spenders" argument, the question of whether price discrimination is an unconscious prejudice or intentional and rational is an interesting one. And this entry addresses that in a thoughtful way.

I look forward to more thoughtful, idea-centric entries like this. It's the reason I keep reading this blog.

I also think bloggers need to develop a thick skin if they're going to open up comments. Any time you open something up to the public, you will attract a group single-mindedly focused on attacking or criticizing other people. From newsgroups to forums to blog comments, it always happens. The only solution is to ignore it. Either dispassionately address salient points (much like this entry), or ignore it all together. Anyone with open blog comments needs to have a thick enough skin that no matter the volume or vitriol, it never gets personal.

[harryh]

I think we can all agree that if we (no matter whether we are car salesmen, or newspaper columnists) can simultaneously refrain from racism (or any other -ism) AND make more money the world is a wonderful place. And I think in most areas of life this is working out just great. If, for example, the New Yorker was racist and had refused to hire Mr. Gladwell way back in the day he no doubt would have ended up with a competitor and helped them sell magazines instead, and the New Yorker would have suffered. The wonders of the marketplace at work!

But what if, in certain circumstances, these two goals work at cross purposes? It's certainly possible that somewhere in the great realm of human endeavor they are not as harmonious. What do we do then? Some people have argued, for example, that in certain professions where the firm invests a large sum in younger employees so that this investment will pay off later in their careers are less willing to hire women for fear that they will quit to raise children.

Now, it may be that firms that engage in this behavior are doing so irrationally and are hurting their long term profits. If so, hurrah! The marketplace will no doubt help us fix this problem in the long term. But what if the firms are acting rationally?

That, I think, is a very interesting question. Certainly a question more interesting than the degree to which car salesmen are fleecing black men.

[EC]

But Mr. Gladwell,

Posner says "might be" in his first sentence, not "is". He says "may be" in his second sentence, not "is". And so on for the "may be" (not "is") and "may" (not "will") in his third sentence.

The point is this. Even if you agree that price discrimination on the basis of race and gender is reprehensible, I think you should at least consider the possibility that it’s a good business strategy.

[Orkney]

Malcolm writes:

"Even if you don’t agree that price discrimination on the basis of race and gender is reprehensible, I think you should at least consider the possibility that it’s a bad business strategy...the market does punish those who practice this kind of irrational price discrimination, since the top-grossing salesmen (the ones that I spoke to anyway) all seemed to make an explicit attempt to treat all customers the same, in order to maximize sales volume."

Um, or maybe they figured that if they told a famous, partly-black reporter that they used race as a factor in determining what price they offerset for their potential buyers they'd get fired (and no longer be in the 99th percentile of car salesmen).

[Redwretch]

HEYYYYYYY Steve's got himself a place for comments.

Well congratu-fucking-lations Steve!

I suppose we'll all now have to start taking you VERY seriously when you post about "black men wanting to be seen overpaying" for various trinkets.

Or not.

[malcolm gladwell]

I'm not sure that answers my question here. Golomb's point was that he offered everyone who walked in the door the "white male price"--regardless of who they were--instead of just offering white males the white male price, as his contemparies seem to do. He was referring to race, gender, appearance, age, manner--everything. (I'm not sure how Posner, having never met Golomb, was able to so perfectly intuit the breakdown of his customer base). And Golomb's argument was that given the incentive structure of the car business, that was a more economically rational thing to do. I'd love to hear some discussion of this larger point. Critics of my treatment of the Ayres study suggest that there is a sound rationale for price discrimination. Given that successful car salesmen (at least the ones I talked to) beg to differ, does anyone care to defend that position?

[Hans Gruber]

"The point is this. Even if you don’t agree that price discrimination on the basis of race and gender is reprehensible, I think you should at least consider the possibility that it’s a bad business strategy."

You have repeatedly intimated that Sailer was defending the discriminatory approach car salesmen employ. That is false. All Sailer took issue with is that the approach was the result of "unconscious" racism rather than a deliberate and rational policy to extract the maximum profit possible from customers. Racism can be rational, that does not mean it is right.

[Hans Gruber]

Gladwell,

Maybe Golomb was telling you what you wanted to hear. What would have been your reaction, and the fallout for his career, had he said he treats blacks differently than whites? Didn't he have an incentive to tell you what you wanted to hear? Just a thought.

And let me get this straight, this great salesman chargea everybody the same price, the white male price, or does he just start at the same point (I don't think his employer would approve of the former)? There is still plenty of room from discrimination even when the starting point is the same.

[L James]

Gladwell: "the top-grossing salesmen (the ones that I spoke to anyway) all seemed to make an explicit attempt to treat all customers the same, in order to maximize sales volume."

I don't trust you anecdotes so let's redo Ayres study but only send our kids to the top grossing salesman.

[Orkney]

Gladwell writes:

"Critics of my treatment of the Ayres study suggest that there is a sound rationale for price discrimination. Given that successful car salesmen (at least the ones I talked to) beg to differ, does anyone care to defend that position?"

That point has already been engaged above: 1) if offering uniform pricing really led to higher profits/commissions/etc., more car salesman would switch over to it, since it's a change that can be implemented quickly with virtually no cost, 2) Golomb lives in an area (according to Sailer's post above, I haven't confirmed it) that is only 3% black, so maybe he doesn't have many black customers to sell to, 3) You keep citing the 99th percentile car salesmen you talked to as a reliable data set on which to hang your notion that top car sellers don't offer different prices to different-race customers; but it's not a reliable data set. Dude, being labeled a racist is just above being labeled a child molester in our society. You went around asking successful, moneyed white salesmen if they practice a form of discrimination against black customers (benign discrimination in my view -- willing seller + willing buyer = no problem). Why would you think they would tell a famous, partly black reporter the truth? They'd be fired the next day. (even if you weren't part black they'd still be forced to lie to save their jobs, but the fact that you are moves their ass-covering percentages from 99.98% to 99.99%.)

I think you're not being skeptical enough of data you want to believe, even though it sounds like it's not accurate data.

[Christopher Horn]

Malcolm,

If its true that the business of selling cars has been marked by a long history of discrimination against the interests of blacks and women, then wouldn't Golomb's black and female subjects be thrilled at receiving the white-only price? And wouldn't they therefore buy more cars, making Golomb's strategy obviously successful?

Please tell me if I read too much into this: if blacks and women are "used to" paying sticker price, *and* blacks and women pay $1,000 more than white males, does it follow that white males pay roughly $1,000 below sticker? It would seem so. If, in Golomb's study, blacks that are accustomed to "paying retail", are now paying "$1,000 below retail", they ought to be quite happy - and consume more of Golomb's cars.

Of course - many people made that exact same argument in the epic threads that preceded this one. Including, if I'm not mistaken, Mr. Sailer himself. My own version of the point is: car salesman are "getting away with" arbitrage at the expense of women and blacks, it is unreasonable to expect the car salesmen to stop on their own, though surely blacks and women, once they figure it out, are self-interested enough to respond to a more equitable market - as Golomb showed.

Having waded through more of the entries in the last few threads than I care to admit, I have to acknowledge Malcolm that I have a tremendous amount of respect for the way you handled this issue on this particular thread. You showed a lot of character, especially in the face of serious criticism, and my respect for you has increased substantially because of that.

One tiny caveat: please don't assume that all of us who don't want to throw the car salesmen under the bus think their discriminatory pricing is "okay". It clearly is not. Its just that blaming the car salesmen for what might be a larger societal phenomenon feels a bit like shooting the messenger.

I mean, who knows how explosive the underlying explanation is. Might it be as unpalatable as: blacks, after experiencing a history of discrimination for big-ticket items (as evidenced for example by openly or covertly discriminatory housing practices) have developed a sense of learned helplessness with all big-ticket items, including cars?

That's possible. Terribly terribly unpleasant. Not the kind of thing you can put in a bestseller. God knows! But - if its true (and I don't necessarily believe so), then focusing on the car salesman's personal failing probably sells the conversation way too short.

[Boing]

When did sampling the 99th percentile of anything become a reliable sample? That's pretty shoddy fieldwork.

You gotta sample all the percentiles, or at least a reasonable range, to get quality data.

99th percentiles are usually known as "outliers."

[Camiel]

Until now the emphasis has been on the assumption that black males face the negative consequences of direct prejudice towards them: they pay a premium compared to black females and white customers.

The paragraph in the post above starting with the word 'Second..' points out that there's something illogical about this interpretation.

What if we looked at it from the perspective that the price paid by black males were the reference and that they, in reality, experienced the negative consequences of discounts offered to white males?

Looking at the data, it is not the most likely theory. The data show that the prices the female groups got quoted are closer to that of the white males: it is more probable that black males were singled out.

But on the other hand, like in any real world situation, multiple factors (like different kinds of prejudices) must have influenced the results. Otherwise, black females should have come back with the highest prices.

Am I making sense?

[Louise]

Malcolm,
In your Washington Post Magazine article "Lost in the Middle" you write that you wonder whether you could have done what your father did -- "marry someone, bridge a gulf of human difference, with [your] eyes entirely closed".

That got me thinking, and since I read your article I've discussed this with several friends who are children of mixed marriages. I asked them "who could you marry with your eyes entirely open?" Their answers were surprisingly different, or predictably, as people rarely agree on the answers to complex questions.

The answers to this question are of course interesting because they inform the boundaries of 'perceived' racial categories and ethnic identity. And that, I think, is a much more interesting point of departure for a debate than the intentions of car salesmen.

Who could you marry with your eyes entirely open?

Best :)

[James B. Shearer]

malcolm gladwell: " ... it’s wrong to try and charge someone more for something because of his or her gender and skin color. ... ".

So when is it ok to try and charge one customer more than another for the same product or service? Anytime you allow prices to be set by haggling you are likely to have gender and race disparities. Suppose for example car dealers tried to charge first time buyers more. Would this be ok? It would probably produce race and gender disparities.

As for sales strategy, it is my understanding that the biggest dealer profits are often in areas other than the price of the car itself such as addons (rustproofing etc.), financing
(charging extra interest) or tradein value. So just looking at the initial price offered gives an incomplete picture.

Finally I agree with the people who are skeptical about whether the claims of top car salesmen about how they sell cars should be accepted at face value.

[Sweetness]

Because there is a great deal of competition in the automobile industry, especially at the retail level, shouldn't we assume that all car salesmen, even the top ones, are price-takers rather than price-makers? If so, then the non-discriminatory 'quote' pricing of the salesmen Gladwell spoke to would not have much of an influence on overall prices, and thus on overall practices. Seems to me that figuring out whether virtue-pricing is more competitive than price discrimination in this context would require a very large sample and a lot of number crunching, not just a few salesmen and their impressions of what works. Such a study would have to disprove the market's apparent verdict (via Ayres) that price-discrimination is more effective than virtue-pricing. Market outcomes are assumed to be rational (not 'right', just rational), so when they aren't we're talking about a market failure.

Moreover, the SES (socioeconomic status) of the areas where the dealerships were located would have to be controlled. Virtue-pricing might work better in an area with a highly-educated population, whereas price discrimination might work better elsewhere. For SES, is Flemington, N.J. fungible with, say, Oakland?

[Joel Grant]

We could do interesting studies on every aspect of this subject. Let's go beyond the opening offer and study how much different races and genders actually pay for their cars. Let's compare how the top 1% of salesmen deal with prospects to how the salesmen in the middle and at the bottom treat prospects.

We could check all of this out. And yet to me, in the end, it is about moral choices. If we agree that some sales behavior is not moral then we can surely quibble over the details.

The little detail about trying to screw people on the basis of their skin color strikes me as slime-o-rama. But it presents a good business opportunity for the energetic dealer who advertises to the effect that 'we do not negotiate our prices on the basis of the clothes on your back or the back under the clothes.'

[Sweetness]

"We could check all of this out. And yet to me, in the end, it is about moral choices."

Well, to students of markets and market failure, it is about whether the economic process is working or not.

" But it presents a good business opportunity for the energetic dealer who advertises to the effect that 'we do not negotiate our prices on the basis of the clothes on your back or the back under the clothes.'"

Exactly. Why hasn't this happened? The incentive of profit should have led to this if it would work. So we wonder why it hasn't, and try to come up with explanations. But condemning the behavior itself is not an explanation, it's a conclusion -- and not a very useful one, unfortunately. It doesn't change anything.

[Boing]

'we do not negotiate our prices on the basis of the clothes on your back or the back under the clothes.'

How could this EVER be proven, one way or the other??? In the end, it's just more marketing. There are so many variables at work, to try to derive concrete conclusions from these data is a fool's errand.

That's not to say packaging up feel-good anecdotes like this into book form isn't a good strategy, though. Feed the ducks when they're quacking, I say.

[James B. Shearer]

Joel Grant:
"The little detail about trying to screw people on the basis of their skin color strikes me as slime-o-rama. But it presents a good business opportunity for the energetic dealer who advertises to the effect that 'we do not negotiate our prices on the basis of the clothes on your back or the back under the clothes.'"

So what characteristics is it ok to try to take advantage of?

Btw fixed price dealerships have been tried and they haven't been very successful. It is tricky advertising that you offer a mediocre price for dumb buyers.