Question

Jo was in the market for a used car when she first moved to Melbourne. She spent many hours walking around at Car City looking for one. She found that the salespeople were overly friendly and asked her lots of questions about her life, which frankly, were none of their business. Why were the salespeople doing this? How do you think this information affected the price of the car? Jo had a budget in mind and ended up paying her top price for a car. What does this mean? How does this outcome affect producer and consumer surplus? What about society as a whole?

Answer 1

When salesperson was asking a lot of personal questions from Jo which were of no use, he was trying to build a personal connect with Jo which is a marketing strategy to charge a higher price from the consumer. Apart from good features of the car, the rapport which the sales person build with the consumer also plays an important role in determining the price of product for a used car which are not fixed.

Gathering this information helped him known his personal background a bit and demand higher price than he would have otherwise charged. Thus, it led to increase in the price of the product. This means that gathering such information is a part of selling cost and a skill of the salesperson which helped them charge more price for his product.

Increase in the price of the product will reduce the level of consumer surplus and increase the level of producer surplus keeping total surplus constant. Thus, total surplus in the economy will remain constant.