Great Deals on Earth, a chain of office supply stores, sells paper shredders. Its profit margin on paper shredders is $40. If a salesperson successfully sells a customer extended warranty coverage, the retailer collects an additional $35 fee for the warranty coverage. Whenever the extended warranty coverage is purchased by a customer, Great Deals on Earth gives the salesperson a commission equal to 20% of the selling price, and Great Deals on Earth sets aside a "repair reserve" equal to 40% of the warranty's selling price. This repair reserve reflects the company's typical warranty claims experience.
When customers ask the salesperson if the extended warranty is a good deal, salespeople uniformly say that it is worthwhile because "repairs costs can be a killer" and "only a brave soul" would leave without also buying extended warranty coverage.
You walked into a Great Deals on Earth store and told a salesperson that you are interested in buying a paper shredder.
a. Does the salesperson have a conflict of interest in answering your question about the suitability of purchasing warranty coverage?
b. Should the sales personnel have to disclose to you their conflict of interest?
c. Consider the economic impact if the salesperson had explicitly told the customer that, "Hey, I make an extra commission on the extended warranty, so I'm telling you that I want to sell it to you. That said, I have sold this product for over seven years and know that the warranty really is awesome." Would you expect this disclosure to increase sales or decrease sales?