Do Consumers Get Excited About Sales They Don't Qualify For?

Tiffany's is (hypothetically) handing out coupons for 50% off diamond necklaces.  This generates a lot of press, but you do not get a coupon.  Are you, without a coupon, more likely to buy a necklace anyway given all the publicity?  Or is your behavior unchanged, because you received no inventive?  Or are you perhaps less likely to buy, with the full retail price you would be paying now seeming higher as compared to the 50% off others are getting?

This issue seems to be at the heart of the conflict between the Obama administration and Edmunds.com (what is it about this administration and picking battles with media companies?)  In their analysis, Edmunds said that only about 250,000 of the auto sales during the cash-for-clunkers period were incremental.  The White House says they are underestimating, because even people who did not qualify for the program bought more cars because of the program:

The White House said [totally great car-buying, car-selling, and all-around-awesome-info site for every goddamn great and awful car website] Edmunds based its analysis on the "implausible" assumption that "the market for cars that didn't qualify for cash for clunkers was completely unaffected by this program. In other words, all the other cars were being sold on Mars, while the rest of the country was caught up in the excitement of the cash for clunkers program."...

Edmunds stands by its analysis.

"Instead of shooting the messenger, government officials should take heart from the core message of the analysis: The fundamentals of the auto marketplace are improving faster than the current sales numbers suggest," [Edmunds jefe Jeremy] Anwyl wrote.

The central issue, Anwyl said, "is how many of these sales would have occurred anyway. Apparently, the $24,000 figure caught many by surprise. It shouldn't have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales -- always in the tens of thousands of dollars."

Edmunds rejected the White House suggestion that people got caught up in the excitement of the program and bought cars, even if they didn't qualify. And it discarded the notion that automakers boosted production solely because of the program.

"No manufacturer increases production, a decision with long-term consequences, based on the 30-day sales blip triggered by an event like cash for clunkers," Edmunds wrote.

Its an interesting question.  I would tend to come down on Edmunds' side from my own experience running promotions, but it is not totally cut and dried.  I can think of at least two examples where a discount to person A yields more sales to person B, but neither are really applicable here

  • Example 1:  Ladies night.  Cheap drinks for the ladies bring in male customers, on the theory that that are looking for bars with, frankly, lots of drunk women
  • Example 2:  Kids eat free.  Restaurants have programs with discounted or free kids meals to get their parent's business

I think one could actually make the argument that people who did not get the clunker discount would be less likely to buy, as its really hard to buy something for X when you know all the people around you are getting it for (X-$3000)**.  This isn't an absolute rule - after all, people fly all the time next to folks who paid more or less for the same service.  But I do think it is a psychological issue that would tend to offset the general excitement around the program.  In the end, we won't have to guess, once we get sales data for the rest of the year and we can see if clunkers merely moved sales forward a few months or generated incremental sales.

**  As shown here, cash for clunkers amounted to about a $3000 subsidy per buyer, above and beyond the blue book value of the car turned in.

  • silvermine

    Supply was the same. Demand went higher, temporarily. How stupid would you have to be to purposely pick a week when you were specifically handicapped (by NOT getting the discount) to go haggle for a car? You just lost a ton of leverage right there.

    The whole world right now is seriously depressing me.

  • david stevens

    I don't think your example #2 applies. The kids aren't buying their meal anyway - this is a straight up discount to mom and dad. If a kids eat free offer were to bring in more people to eat who don't have kids (you know how people who don't have kids love to be in a restaurant with them running around) then this would be analogous.

  • James H

    I did not qualify, and don't know what "all the excitement" is about the program. I haven't talked to anyone that I found to be excited about this unless they had a "clunker" to trade. I'm less than excited about paying for this for the rest of my life plus interest along with the rest of the stimulus waste programs.

    The other effect was removing affordable vehicles from the market, or raising the price of them, which hurts lower-income families or individuals needing a vehicle.

  • perlhaqr

    The only thing I could see affecting the rates of sales to people who didn't qualify for a "clunker" subsidy was that I saw a lot of dealerships running other, simultaneous sales, during the clunker event.

    But I don't think that's very analogous either, because those people weren't excited by the discount others were getting, they were excited by the discount they were getting, even if it wasn't as large as those who were the recipient of tax dollars.

  • Another guy named Dan

    I think that the main result of both the Cash-for-Clunkers and first house tax credits was to move sales that would have likely happened anyway forward by about three months. The January numbers for both markets will be telling as to whether these programs actually increased any, rather than dislocating, demand in the housing and auto sectors.

    Yes, the incentives did likely increase traffic at dealerships and open houses, but I think that these people would have been in the market in the next few months anyway.

    I think the administration is trying to argue that these programs were the equivalent of the $29 VCR sales we ran back when I sold electronics. People would get to the store to discover that the $29 machine was a two head, had a 10 channel tuner, and looked like it was assembled by monkeys using Elmer's glue and paperclips. Our goal as salespeople was to upsell them to the $100 and more models that had the features that people actually wanted. These programs seem to have been structured specifically to prevent this from happening.

  • morganovich

    this analysis also leaves out the dead weight loss of destroying existing cars. not only is that environmentally ludicrous (can you really claim that a few extra MPG over a car's lifetime will make up for the environmental cost of building a whole new car and disposing of an old one?), but it's fiscally stupid both in it's overpayment and in the requirement to actually destroy the engine, yet another cost added to the equation.

    this was a naked, disgusting subsidy to car manufacturers both from a cash grant and a supply of competitive product standpoint.

    it's green credentials are farcical.

    alas, i fear that makes it par for the course among "green jobs" creation initiatives.

  • richard

    Warren,

    The idea that a manufacturer would increase production base on a single month sales blip looks a lot like the 'permanent income hypothesis', but then not for individual consumers, but for corporations.

    http://en.wikipedia.org/wiki/Permanent_income_hypothesis

  • agesilaus

    Well we were in the market when this boondoogle went into effect, we needed a low priced second car to get the wife back and forth to work. But figuring that the dealers would be less inclined to deal since the lots were depleted we just put it off, haven't done anything yeat as a matter of fact.

  • Michael

    morganovich,

    You are quite right. I have a 94 Explorer that I keep to let the family haul plants and other dirty home improvement goods around in. So it's not in the best of shape. KBB put it's value at $400 this past spring. KBB now values the car at $1,500. The lower middle class had it's tax money used to provide perks for the upper middle class. Now when the lower middle class needs a car in the future, they will get hit with higher prices.

    We will continue to see this administration to play this same financial game with health care. Younger, lower wage employees will have much higher taxes to cover the health care perks promised to seniors.

  • John David Galt

    The funny part -- and what most of the people affected don't know yet -- is that everyone who got the subsidy is going to have to pay it back on their 2009 tax return. The joke's on them!

  • TomB

    I suspect that C4C generated paper growth by shifting timing rather any organic growth. But a more recent post of your's suggests a mechanism that would encourage people to trade in their cars now.

    http://www.coyoteblog.com/coyote_blog/2009/11/the-unintended-consequence-they-pretended-not-to-expect-but-everyone-predicted.html

    The price of cars in the $3000 to $8000 range was pushed up because all the "clunkers" were destroyed. So your 10 year old, 100,000+ mile Honda, normally worth $7000, is now worth $8500. Time to buy...another Honda.