Common Tread

When does a deal turn into a steal?

Nov 02, 2017

In America, if you knowingly sell someone a clunker, you’re considered an asshole. 

Our laws generally protect buyers who were hurt by sellers who were not forthcoming with information, especially negative aspects of the item being sold. The laws acknowledge that in many cases, a seller benefits from the asymmetry of information. But is it possible for a buyer to rip off a seller?

Case study

My good buddy Nate and I share “finds” all the time. We’re very respectful of one another, and neither of us goes after something the other is pursuing. Nate sent me a craigslist link one day I told him I’d already seen. It was a Ness-style digger bike powered by “a generator Shovel” for an absurdly low price. I had already dismissed it as “too-good-to-be-true,” and gave him my blessing. Scam, right?

Ness Shovel
That grin tells you all about the bargain. Photo by Lemmy.

The next week, I was ogling his legitimate, near-mint survivor. The bike was actually titled as a ‘54 (so it was a Pan wearing Shovel tops), and Nate took it home with a second, painted-to-match tank for $5,000. (This is well below its true value. $15,000 or so would be a pretty fair estimate.) The seller was an older guy, and he bought the bike in the 1980s, exactly when this bike would have been in the basement price-wise. However, the market came back for legitimate old choppers built with quality aftermarket parts — but the old-timer didn't realize the value had risen, and Nate handed him exactly the amount the greybeard asked for.

I whistled when I heard that, and I still grin when I see the bike, because that’s still one of the best deals I’ve ever personally seen go down. But how good a can a bargain be before it’s too good? Everyone I know dreams of “the barn find” (the antique guys) or “the pissed-off spouse” (modern bike people and racers). But I have to wonder if I would personally be happy if I got that deal. Could I sleep at night? Did Nate swindle someone?

Econ with Professor Stupid

Intimate knowledge of a used good is inherently presumed to be the domain of the seller, as George Akerloff postulates in “The Market for Lemons.” Sellers may be aware of a leaking oil pan gasket or wonky starter switch that a buyer likely won’t discover on first inspection. The potential existence of a problem — and the (unknown) cost of resolving it — is part of what keeps used bike prices fairly low relative to their new brethren. If a new bike is the gold standard for what we all want to own, who would sell a two-month old bike? Answer: someone who got a lemon. That’s a big part of the “drive it off the lot” depreciation we are all familiar with.

Most germane to this article is that information asymmetry that I’m normally betting on. Bargain-hunters believe they possess an above-average knowledge of how bikes are put together. They’re betting that if they don’t show their cards and reveal their knowledge, they can identify bikes in above-average condition or bikes worth significantly more than the seller wants. Buying with an eye towards reselling it for a profit (or using the bike and taking the profit in terms of wear and tear) is not a new idea, and it even has an economic phrase to describe the action. “Exploiting a market inefficiency” is capitalizing on the difference between an item’s price and its value.

Sold!
Sold! Photo by Lance Oliver.

The extreme example of this is the proverbial little old widow with a Crocker in the garage. Everyone dreams of this scenario because it’s psychologically delicious. Rather than a seller “getting one over” on the buyer (as "The Market For Lemons" postulates), the tables turn. Now, the dedicated motorcycle enthusiast has the opportunity to buy a very valuable machine from an owner who values it little more than so much scrap metal.

I think this is part of why Nate’s Ness bike is so interesting — it was a clean, significant bike that was purchased far below what a motivated seller could have gotten for it. It’s the shed-hunter’s dream. But should he have done the deal? Nate seemed to know a lot more about the bike than the seller did. Can “deal” turn into “steal?”

In conclusion Inconclusion

I strongly suspect that for most, this is an ethical issue, rather than a legal or economic one. And I’m not sure that I would be a good arbiter. And what happens when the information becomes symmetrical, but a lopsided deal still goes through? What if a buyer says to a seller, “Hey, that old bike’s worth a lot more than you’re asking, and I don’t have the money to pay you what it’s worth,” and then the bike and money still change hands?

Surely the seller is deriving something from the sale. (Ease of selling, seeing it go to “the right buyer,” or maybe just the satisfaction of helping out someone who wanted to get an old bike back on the road. Someone will surely chime in about the value of those utils being calculable.)

Is the value of a bike whatever two people shake hands on? If the guy who owned that Ness Shovel laughed all the way to the bank, was this a raw deal? Are you an objectivist or a relativist? I can only answer those questions for myself.

I always want a real, real good deal — I just can’t tell you exactly what shape it should take.