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I don't actually think buying cars sight unseen is the main obstacle here, because what you're describing (folks taking advantage of the system) represents a ti

by whakim 4y ago

I don't actually think buying cars sight unseen is the main obstacle here, because what you're describing (folks taking advantage of the system) represents a tiny percentage of transactions. I think the biggest issue is that you've taken a business which has notoriously low margins (used cars) and you're operating on the lowest margin end on both sides. On the sell side you're buying cars that would otherwise be sold private party - i.e. from the most price-conscious sellers. On the buy side you're competing against dealerships on price but also offering a more premium/white-glove experience which eats into your margins.

scarface74 4y ago
The problem is that like with OpenDoor, asymmetrical information favors the seller. If I know I can get a better deal, I’m not going to use Carvana or OpenDoor. If I know there is something wrong with my car/house I’m going with Carvana/OpenDoor.
- slt2021 4y ago
  aka "Lemon markets theory" by George Akerlof, which won Nobel Prize in Economics in 2001 https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
  - scarface74 4y ago
    Thanks for the citation. I listen to a lot of economic podcasts and subscribe to Ben Thompson’s Stratechery newsletter/podcast. I couldn’t remember where the theory came from.
- xyzelement 4y ago
  Btw I think you are describing "adverse selection"
- ghaff 4y ago
  Which usually works against a consumer when dealing with businesses. But, in the case of used cars, there are definitely cases where a seller knows that some major system of their car is basically being held together by duct tape--which gets them a good purchase price and may well screw the ultimate buyer of the vehicle.
- whakim 4y ago
  But everyone knows they can get a better deal than Carvana/Carmax/etc. - they're selling to Carvana because it's convenient. In theory, Akerlof's lemon theory could lead to a situation in which Carvana has to underpay to account for all the lemons they're buying to the point that sellers aren't willing to take the hit. In practice, I think this just isn't a big deal - they aren't buying enough lemons to move their offer prices much, and the convenience factor is worth quite a lot of money to sellers. If this was truly a major issue I think we'd see it with CarMax who are wildly successful.
  - scarface74 4y ago
    Carmax does a thorough enough inspection at their shop with trained mechanics beforehand.
Retric 4y ago
It’s a tiny percentage of the market, but if you’re not doing due diligence then it’s going to be a large problem for you.

by whakim 4y ago

scarface74 4y ago

The problem is that like with OpenDoor, asymmetrical information favors the seller. If I know I can get a better deal, I’m not going to use Carvana or OpenDoor. If I know there is something wrong with my car/house I’m going with Carvana/OpenDoor.

slt2021 4y ago
aka "Lemon markets theory" by George Akerlof, which won Nobel Prize in Economics in 2001 https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons
- scarface74 4y ago
  Thanks for the citation. I listen to a lot of economic podcasts and subscribe to Ben Thompson’s Stratechery newsletter/podcast. I couldn’t remember where the theory came from.
xyzelement 4y ago
Btw I think you are describing "adverse selection"
ghaff 4y ago
Which usually works against a consumer when dealing with businesses. But, in the case of used cars, there are definitely cases where a seller knows that some major system of their car is basically being held together by duct tape--which gets them a good purchase price and may well screw the ultimate buyer of the vehicle.
whakim 4y ago
But everyone knows they can get a better deal than Carvana/Carmax/etc. - they're selling to Carvana because it's convenient. In theory, Akerlof's lemon theory could lead to a situation in which Carvana has to underpay to account for all the lemons they're buying to the point that sellers aren't willing to take the hit. In practice, I think this just isn't a big deal - they aren't buying enough lemons to move their offer prices much, and the convenience factor is worth quite a lot of money to sellers. If this was truly a major issue I think we'd see it with CarMax who are wildly successful.
- scarface74 4y ago
  Carmax does a thorough enough inspection at their shop with trained mechanics beforehand.

Retric 4y ago

It’s a tiny percentage of the market, but if you’re not doing due diligence then it’s going to be a large problem for you.