Why slow car sales are bad for consumers

Why is it that people like to do what everybody else is doing? I'm sure that psychologists, sociologists, sociobiologists, and even theologians could weigh in with a learned answer, but the fact remains: People do what other people do.

This behavior pattern has huge implications for economics. Remember the dot-com bust? (As if you wouldn't.) It had a lot to do with millions of people investing in companies whose business models they didn't understand. So why did they invest? Because everyone else was.

Even when people diversify their investments, they tend to diversify in the same way. As a result, they all become exposed to the same market fluctuations.

And so it is with automobiles. It seems that everybody these days isn't buying a car. Now I realize that many people have a damned good reason to avoid buying a new set of wheels — unemployment, for example. But really, the reason a lot of people aren't buying is because, well, a lot of other people aren't buying.

Now that's okay in the short term. But in the long term, it's bad, especially for consumers.

Consider the following diagram, which illustrates a simple fact: The longer you wait to buy a new car, the more desperately you need one.

The problem is, the underlying "me too" dynamic that prohibits people from buying cars continues to work beneath the surface. So, once enough people give in to their desperation and decide to buy a car, there's a good chance that millions of other people will decide to do the exact same thing.

But the cars won't be there, for the simple reason that automakers had to scale back (or go out of business) because of poor demand. And what do you get when high demand collides with limited supply? Well, let's just say that it's a bad time to ask your local car salesperson for a "good deal" on that nice little sports coupe. Unless, of course, you like being laughed at in public.

(BTW, if the diagram seems familiar, I adapted it, with considerable license, from an illustration in William Jevons' Theory of Political Economy.)


Anonymous said...

Will the demand for cars grow in the long term?
The suburban sprawl is becoming unfashionable, people will live closer to work and commute less. Cities will become more compact. It is quite possible the large cities with creative populations (New York, London…) will grow, the other ones will shrink. Public transportation in Europe is picking up. Working form home will become widespread.
The need for personal transportation may well decrease.

Paul N. Leroux said...

Anonymous, you bring up a good point: people who live in the suburbs drive more cars (because they have to!) and generally have a larger environmental footprint than inner-city dwellers. When I lived in downtown Toronto, I drove my car once or twice a week. Now that I'm in the suburbs, I drive my car at least twice a day. Working from home might reduce the problem by allowing my family to use just one car instead of two. But having no car at all would be very difficult, especially during the winter months (all six of them!) in Ottawa, when it is almost impossible to ride a bicycle.