Saving money on a plumber – game theory in practice

The other day I called a new plumber for a non-urgent job. He came to my house, and after inspecting said, “It’ll be $150 and I can do it today. What do you want to do?”

I had no idea how much the job should cost, so I had to make an informed guess. Which of the following scenarios was most likely?

a. the price was a big discount
b. the price was a small discount
c. the price was fair
d. the price was a small markup
e. the price was a big markup

It might seem like there’s not enough information, but that’s the beauty of game theory – it can help you find answers even if you don’t know the question. By thinking strategically, I arrived at the right decision. Here is the logic I went through.

Could it be a fair price?

It was possible the plumber was quoting the fair price, not too high or not too low.

Some products are priced this way this because the brand exercises control over retailers, like Bose audio speakers or Apple products.

But plumbing is a different kind of product. There is a wide range in prices and a lot of discounts. I am constantly getting mailings with discounts for plumbers. Even my town calendar has a few coupons for plumbers.

The game is one of building trust and getting repeat customers. And most plumbers entice new customers with discounted service.

It seemed very unlikely to me that the plumber was simply quoting a fair price. I expected a price that was either discounted or marked up and I thought about each case.

Could it be a discount?

It was logically possible the plumber was giving a discount. I’ve been lucky like that before.

But I thought about how the plumber quoted me. He had said, “It’ll be $150 and I can do it today. What do you want to do?”

The important part is what he left out: he didn’t mention that he was giving a discount or a good price.

The omission is an important signal since businesses almost always emphasize discounts and promotions. It’s part of their strategy to get goodwill and repeat business. As I’ve written before, the game of discounts is very carefully calculated. A business that gives a discount without indicating it is doing something very, very odd.

That is why I could be very certain I was not getting a big discount or any discount at all.

How big was the markup?

I was then deciding how much I was being overcharged. If it was a slight markup, I was tempted to say yes and just get it done with.

So what is more likely: a slight markup or a big markup?

A bit of strategic thinking about repeated games can suggest an answer. The plumber knows the risk of quoting a high price. If I hired him now, and then later learned I was overcharged, I would obviously decide never to call that plumber again. (The game would end right there as I execute a “grim trigger” strategy.)

The plumber should anticipate my reaction, and reasoning one step further, I can figure out his motivation. If the plumber is going to overcharge, he has to make it worthwhile to compensate for losing future business. The one-shot deviation has to be sufficiently profitable or it’s not worth it.

Therefore, if the plumber is overcharging, he’s likely quoting a large markup. It can’t be outrageous like $1,000 or I would catch on right away. The plumber has to carefully craft a price that seems reasonable even though it is expensive.

Putting it all together, I highly suspected the $150 price was a big markup. I politely declined the service and tried to find someone else.

What happened next

I decided to call more plumbers. I was worried others might charge even more and that would signal a long search for me.

As it turned out, I got lucky. The very next plumber offered a price of $50–and he mentioned it was a very good price. I went through the logic and figured it was worth a shot. It was a win-win since I got a good price and the plumber won me over as a repeat customer.

In a way it all worked out and I was happy. It wasn’t an ideal situation: I wished I knew  plumbing prices in advance, and I wished I was just more handy. But in life it’s not possible to know everything. There are going to be situations where decisions have to be made with incomplete information.

It’s those times that strategic thinking is most valuable and game theory can really pay off.

Key lessons

–Think about the other person’s motivations
–In repeated business, don’t settle for full price on the first time
–An initial non-discounted quote may be a big rip-off