Marginal Costs Should Include All Relevant Margins
By David Henderson
Last week, I took my remote key to my 2015 Toyota Camry to the Toyota dealership. I wanted a new battery. I’d done it before. They had installed it for me (I’m not good with such things) and the overall charge with tax was about $11 or $12. The remote with the old battery was hit and miss–not working at the start of the day and then working through most of the day. I wanted it to work all the time.
After the Toyota guy installed the battery, I went out to the car and tried it. It didn’t work even though it had been working before we replaced it. So he tried another new battery. Same result. He suggested that I set up an appointment to get the key fixed. I said that probably wasn’t the problem because it had just worked a few minutes earlier. I told him that I wanted him to fish the old battery out of his trash, replace the new with the old, and give me a refund. He did.
A friend suggested that I go to a good hardware store. Saturday morning I went to my local Ace Hardware store. (First time I haven’t worn a mask in that building in over a year: it was glorious.) The guy said he had the battery and I asked him if he could install it. He said he could as long as I released him from liability for breaking it. Since I figured he would be less likely to break it than I was, that was an easy choice. I had a further choice: pay about $4.50 for a new battery or about $8 for 2 batteries. It wasn’t a hard choice: I told him that since my experience was that a battery lasted about 3 years, by the time I needed to replace this one, I would have misplaced the second one. So I took one battery. He took apart my key, took out the old battery, and replaced it. I ran out to the parking lot and clicked the key, and voila, it worked. Delighted, I came in to pay for the battery. Although the guy had on his mask, I think he was smiling with delight that it worked.
I realized, though, another reason not to have bought the second battery. Let’s say I had and that 3 years later, I needed to replace the current one with the 2nd one. As I said, I’m not good at that, and so what would I have done: gone back to the hardware store, shown them the receipt, and asked them to install the new battery for free? That might work, but it might not. I would be taxing their good will. But if instead I buy a new battery 3 years from now and ask them to install it, the odds are very high that they will.
So the marginal cost of the battery being replaced next time will be about $4.50 plus whatever amount the price rises by. By contrast, if I had taken the second battery, the marginal cost looking forward at the time of purchase would be $3.50 plus the cost of finding it 3 years from now plus the cost of taxing the hardware store’s good will. It was this third factor that I didn’t think of and that, when I thought of it, made my decision to buy just 1 battery look even better.