Tuesday, July 1, 2014

The One Crazy Trick Lojack Uses to Make the World a Better Place

Car is having engine troubles.

Took it to the dealership.

Saw signs for Lojack.

Lojack doesn't advertise on the products they protect.

Two reasons.

1) It's easy to create a false signal: a non-customer could put a sticker in the window. The game theoretical outcome erodes the credibility of the signal.
2) Good for business to catch a thief for real. Fewer thieves stealing cars, more apt to attract new customers at the dealership.

Note: the social outcome should be (ceteris paribus) fewer auto thefts. Positive externality. Standard economic theory predicts that this service will be under-supplied in the marketplace because people have an incentive to free-ride.

How strong do you suppose the free-rider effect is here? What factors might mitigate it? Is Lojack undersupplied? How would you test that hypothesis?

2 comments:

  1. The problem with reason #1 is that home protection companies do use stickers. How do you explain that?

    The real reason is that there are only about a dozen places to install a LoJack, so if you tell a car thief you have one, he can get rid of it. This isn't a problem with home security because you can't drive a home away.

    ReplyDelete
  2. Also, see http://www.nber.org/papers/w5928

    ReplyDelete

Do you have suggestions on where we could find more examples of this phenomenon?