Monday, November 23, 2009

Big Ticket Turkeys

The approach to the Holiday Season is over.  The season for giving both thanks and gifts is upon us.  If you don’t believe me, you’ve not gone shopping in the past three to four weeks.  To celebrate, people often make the choice to purchase a big ticket item for the family; a TV, a car, a surround sound system, a new computer, or any other consumer good that a family member believes embodies the spirit of the season.  What do we know about shopping for and buying these items?  First, I’ll present a little consumer search theory to be followed by some bullets to take with you to your shopping experience.


Assume you know that the good you are planning to buy costs either $1,000 or $1,500, depending on the store.  You know that half the stores charge $1,000 and the other half charge $1,500.  If this is true and you shop only one store, there is a 50% chance the price will be $1,000 and a 50% chance the price will be $1,500.  From a probability/price evaluation, your expected price from shopping one store would be $1,250 (=0.5*1000+0.5*1500).  What happens when you shop two, or more, stores?  If you shop two stores, the expected price falls to $1,250, as there is only a 25% chance that both stores will charge the higher price and a 75% chance that one, or both, of the two stores will charge the lower price.  The bottom line is clear, the more stores you shop, the lower the price you should expect to pay.  The following table displays the number of stores, the expected price, and the marginal savings from each successive store:


Number of Stores

Expected Price
























As can be seen, the greater the number of stores you plan to shop, the lower will be your expected price.  You must remember, however, that you will pay either $1,000 or $1,500; depending on the effectiveness of your search.  Also, note that the more stores you search, the lesser will be your expected savings from adding each successive store.  As economists, we believe that people, on average, will search until the marginal benefit from searching another store (savings column) equals the marginal cost of an additional search (travel, time, parking, and et cetera).  Clearly, if the costs are greater, you will search less – like shopping on Christmas Eve! – but if the costs are small or the savings gains large, you will shop more.


So, how do we decide what to buy and what tips can I offer you to think about and discuss with your family and friends:


·         Don’t use your credit card unless you plan to pay the balance off in full before interest charges accrue.

·         Determine what your needs are, select appropriate models/manufacturers and search on the internet to find typical prices.  (That is, determine the potential gains from search.)

·         Use Consumer Reports or for quality and price comparisons.  When comparing store prices with internet prices do not forget about sales taxes, shipping costs, maintenance and repairs, and additional necessary equipment.

·         Set a budget.  Set a budget.  (It is worth repeating.)  Yet, do not buy the lowest priced item you find as it may not be the quality you wish to purchase.  Sometimes a few dollars more at purchase will result in a product that lasts much longer than the lower priced goods.  Here, the time you expect to own the good might be the determining factor.  (When I was in graduate school a rear window of a pickup truck on top of a cantaloupe crate served as my coffee table for several years.  When I moved, I left the window behind and carried my 12” LPs to their new home in Missouri in the cantaloupe crate.)

·         Do not be afraid to negotiate.  Sometimes you can do this, simply, by looking hesitant.  The fact is that, at some point, if you don’t ask them to dance, they will not dance with you.  If you don’t ask, the answer will certainly be “NO”.

·         Avoid extended warranties.  Yes, I know that you’ve heard people talk about how glad they were that they had a warranty.  Remember, however, that the ones who paid $200 for a warranty on a $1,000 TV, never brag about the $200 they wasted or how much better they slept, knowing they could have gotten their TV repaired, if they did not use the warranty.  Extended warranties are a huge profit center for merchandisers.  The price for the warranties and the probability of the warranty being used are on the side of the merchant.  It is like gambling and the odds favor the casino – every time!

·         Be skeptical of “no interest” or “no payments until ____” offers.  If you qualify and have the money to repay in full at the end of the grace period, they can be good.  Remember that the additional “credit” will affect your credit score.  Also, make sure you read the fine print and to always remember, If it is too good to be true, it is not true.


In closing, enjoy your Holidays and enjoy the process of giving.  Be thankful for what you have, as well as what you will receive.  We are blessed to have the opportunity to celebrate and show our thanks.  At the same time, remember that others may not be as lucky.  Extend a hand of friendship and fellowship to those that may benefit from your generosity.  This week, eighteen of my students took me to the local food bank to package food for the needy in our town and surrounding area.  That night, the manager told us that 9,400 households, of 53,094 households, in Boone County live from the food donated by our local Food Bank.  That is one out of six households in one of the more affluent counties in Missouri.


Truly, if you’ve food on your table and optimism in your heart, you have many reasons to give thanks.  If food on the table is the minimum for financial success, let us all hope that people can make the right choices and that more are able to share in our bounty.   Enjoy your giving of thanks!


Robert O. Weagley, Ph.D., CFP(r)

Salus populi suprema lex esto. 

- Motto of the State of Missouri


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