Wednesday, October 03, 2012


What is the total cost of a car?

  • Price tag on car 
  • Fuel efficiency (subject to driving conditions) * Cost of fuel * Total distance  
  • Maintenance Intervals * Average Maintenance Cost 
  • Insurance Costs  
  • If on debt, payable interest. 
What you finally pay for owning a car is much more than the price tag. I don't know of a single portal for cars which compares this total cost. I don't even know if this data is public. 

Product Equivalence 
Cars do compete with cars, but then they do complete with motor cycles and buses and autos. So competition for car could be a good combination of motor cycle (short distance), bus (little longer) and train (much longer).  

Conditional Products 
Car insurance is needed only if you have a car and so is car maintenance. Given that most car manufacturers in India only provide maintenance  through their own car dealers, the market is monopolistic. Most spare parts are produced only by the car manufacturers and retailed only through car dealers. The point essentially was conditional products skew the free market. Samsung refrigerators need water purifier that can only be purchased from Samsung. This is where I feel we need some law that forces manufacturers to make sure that the price of all parts put together in the car is not more than the car itself. Or at least this information is public so that we can calculate the expected maintenance cost. May be I should add repairability section also.

Returnability or Repeatability
The margin on small diamonds are over 50%. So you can buy it for $1000, but when you go back to sell it, it will only fetch $500. The value of car drops by 10% as you sign the check.  We only look at "a" sale in free market, but not the second sale of the same product or third. Basically what happens to product price over lifetime, given nothing major happens in the economy. No one seems to talk about this in economics. The question really is about extent of damage that can be caused by asymmetric information in free markets. If manufacturer is forced to define "Product Lifetime" then in a free market, manufacturers should be ready to take the product back given the percentage of "Product Lifetime" used by you.  

Technically a house is worth some function of rent it can fetch at max to be a reasonable investment. A taxi is worth it if "total cost" + labor (driver salary) < total profit. May be some taxi service can use cars parked in office all day and give people rent.  But that apart, many things are not rentable at all. Obviously this is not applicable to food. But if something is rentable, it gives some idea of its time value, which can then be used to calculate its total value, given the life time of the product. 

Product Lifetime
Mobile phones typically last 2-3 years unless stolen. TV and refrigerators can work for 10+ years unless new technologies make them obsolete. Software has much shorter lifetime. Laptops again hardly go beyond 3. Vegetables at edible probably for a week or so, even though the production cycle takes months. Cereals last longer. Movies have few weeks at max to get even. Cars run for 5+ years easily. The reason I am talking about product lifetimes is because they are useful when talking about rentability (above). They give a better idea of the utility of the product because you can divide this number by days or months or years and see if that is good enough for your budget. This also comes into picture if you need to resale it.  

No comments:

Post a Comment