Question

This past year, Used Imported Autos sold very few cars and lost over$\mathbf{\text{\$500,000}}$ . As a consequence, its manager is contemplating two strategies to increase its sales volume. The low-cost strategy involves changing the dealership name to Quality Used Imported Autos to signal to customers that the company sells high-quality cars. The high-cost strategy involves issuing a $\mathbf{10}$-point auto inspection on all used cars on the lot and offering consumers a$\mathbf{30}$ -day warranty on every used car sold. Which of these two strategies do you think would have the greatest impact on sales volume? Explain.

Short answer

By delivering trustworthy indications of the product's attributes and minimizing information asymmetry, the second option has the higher impact. It reduces the manager's chance of losing money while simultaneously offering outstanding things to the consumer.

Step-by-step solution

Signalling 

Signalinglets customers clearly and effectively access the hidden qualities of goods and services supplied that impede the consumer from reaching a final decision. It is one of the methods that corporations may use to cope with the uncertainty and information asymmetries that impact corporate revenues.

In this method, the better informed or information possessing party indicates the less informed about to make the less informed party choose the better option out of all the options available to them.

Strategy with the greatest impact 

In this situation, the dealer-ship manager is facing losses and is considering two options to boost client trust. The easiest solution is to simply rename Used Import Cars to Quality Used Import Cars.

Despite the low cost of this method, it will not provide the customer with essential information on the conditions and attributes of the automobiles, which is ultimately what counts to them when purchasing a vehicle.

To increase the quality of service, the manager can conduct a 10-point auto check on all available vehicle inventories and provide consumers a guarantee of up to 30 days.

Despite the fact that this is a more expensive strategy that may increase company expenses, it will result in a short-term increase in sales because customers will be able to obtain information about the conditions of each vehicle. Thus, it will reduce the risk they will take, giving them more incentive to purchase.

This second alternative will lower the manager's risk of gaining losses while also providing excellent items to the user by providing trustworthy signals of the product's qualities and avoiding information asymmetry.

Therefore, the second case will have the greatest impact.