Used auto sales is a rigged business. Dealerships aren’t designed to let customers choose the product they want, they’re designed to get customers to buy whatever car happens to be on the lot. To make that happen, dealers rely on a group of advantages that combine information asymmetry, pure mathematics, and human error. It’s the exact same strategy used by casinos.
The House Edge Phenomenon
The gambling example is helpful, so let’s look at that first. Casino games have slightly negative payout rates if you average over enough games. In standard roulette, there are 37 slots to pick from, but you only get 35x your bet if you win. The house has a slight advantage in the odds—a slight edge. Slot machines are even simpler: they’re just programmed to pay out a little less than they take in. Play long enough and they’re a guaranteed loss.
But bad odds aren’t enough on their own. If everyone in a casino lost money every time, no one would play. So the games and the casinos themselves are designed to deceive players, to give them the hope that they might be the lucky odd one out. Casinos take away clocks and windows, add in bright lights and loud sounds and copious drinks, and suddenly it’s very easy for visitors to lose track of time, lose track of the odds…and lose track of their winnings. This phenomenon in the casino business is called The House Edge.
Gambling at the Car Dealer
Car dealerships do the same thing. Where a casino works hard to make sure you don’t know the real odds of their games, a dealership works hard to make sure you don’t know the real value of their cars.
It’s almost impossible to get accurate information about the cars’ condition, which is the most important determinant of value. Without knowing the condition, price guides are no use, and a clever dealership won’t even let you get an accurate sense of how much the car costs, by changing list prices at the last minute, hiding fees and conditions in the deal, or using other tricks.
That’s the “information asymmetry” part of the house edge. They know how much the cars are worth and how much they’re charging, and you don’t.
Then there are the negotiating tactics. Last-minute changes. Carefully structured deals. Restrictive, low-quality financing options. Indirect answers to questions, carefully omitted information, inaccurate comparisons between vehicles that are actually very different.
The Bigger Picture
The goal of all this is to get buyers to give up. They want you to stop trying to find the right car for you, at a price you can afford, and just do what’s easy: buy the car in front of you.
It doesn’t work every time. Some people really do get away with a steal. But it works most of the time, and customers are left relying on luck and gut instinct when they’re trying to make a major financial and lifestyle decision.
The idea of the house edge is important: it’s the fundamental problem with the whole business of used car sales. To help you out, we’ve broken it down into three major advantages, which you can read more about below: