Recently my truck was stolen and I had to get new wheels. For the first time in my life, I am considering buying a new car. This process required hours of searching. painful bargaining. And, quite frankly, many dealer encounters that were completely overlapping.
Cars, of course, are expensive, especially with supply chain debacles causing shortages. But that’s not all. Shopping for a car is different from shopping for most other products. For example, unlike a computer or refrigerator, a car typically doesn’t sell for one standard price. Ten people might go to a dealership and buy the exact same vehicle, each paying wildly different amounts.
Economists call this kind of pricing strategy “price discrimination.” In that case, instead of charging everyone the same price, sellers charge different prices based on their willingness to pay. Simply put, it means that the seller squeezes as much money out of you as possible. Not all dealers engage in this pricing tactic, but many often use snake oil-style salesmanship, deceptive marketing tactics, hidden fees, and floor mats, alarm systems, and anti-corrosion undercoatings. We are actively using expensive add-ons such as. Some consumers refer to outfits that employ these tactics as “stealerships.”
The tricky pricing strategies used by dealers can anger consumers, and personally, I find it exhausting to negotiate prices for new trucks with slick, commission-seeking salespeople. I noticed (fortunately my partner proved to be a talented negotiator).
Many economic studies have found patterns in who bears the brunt of this pricing strategy. it’s not clean. For example, many studies show that dealers tend to charge people of color more than whites. Another study found that older people tend to be charged higher than younger people, and older women tend to be charged the highest of all.
One study found that dealers tend to treat a buyer’s decision to trade in a used car like a flashing neon sign on the forehead that says “Charge more”. This is because trading in a used car is easier than selling it directly, but it’s also less profitable. Dealers seem to take this as an indicator that you are either clueless or willing to burn your cash. It also gives you a wealth of information about how much you can charge depending on the type of car you trade in.
Usually when there is ample supply and the dealer is more concerned about putting the car up for sale, it is common to charge less than the manufacturer’s suggested retail price (MSRP). However, supply chain issues have led to a recent shortage of new vehicles, and many dealers are charging much higher than the manufacturer’s suggested retail price. On the other hand, dealers who don’t add markup to their MSRP are quickly depleting their inventory and are often left waiting months or even years for the coveted vehicles.
Michelle Krebs is a longtime automotive researcher and executive analyst at Cox Automotive, which owns brands such as Kelley Blue Book and Autotrader. “This is the first time in my career, and it’s been a long career, but I’ve seen most dealers charge above list price,” she says. Because demand is high, inventory is low, and we can do that.” Krebs says he has seen several cases where distributors have charged buyers literally tens of thousands of dollars more than the suggested retail price.
car manufacturers and dealers
Dealers are typically independent franchises of related automakers. So when it comes to pricing, it’s basically an autonomous business that can do whatever it wants. But many automakers aren’t happy that their franchises charge very high markups. It also suggests that it will draw consumer attention to the car brand as a whole.
At least some automakers know this. Hyundai Motor wrote to dealers earlier this year urging them to stop deceptive practices such as advertising lower prices online and charging customers much higher prices when they enter the store. , complained that the extremely high markup “undermines the brand’s long-term ability to acquire new customers and retain loyal ones.”
Similarly, the Ford Motor Company has urged dealers to cut markups or threatened to cut sales of Ford’s most coveted car. Trucks and Ford Broncos are some of the most expensive cars on the market and are regularly priced well above what Ford says they should sell for. Ford’s Problem: Dealers are independent and MSRP is just that. was suggested.
New automakers like Tesla and Rivian are looking to build distribution and service networks that abandon the use of independent dealers. We are building a direct-to-consumer model. You don’t have to worry about negotiating prices with distributor middlemen or commission-seeking salespeople. To meet face-to-face needs, these automakers offer their own dealerships and service centers.
However, there are state franchise laws all over the country that protect independent dealers, and these laws are disrupting the dealer system and making it harder to provide consumers with a better way to buy a car.
V8 political engine
To be fair to dealers, they offer a service that counts. They provide an essential distribution and service network for both manufacturers and car buyers. They give buyers the ability to check out, test drive and learn cars at their facility but it really costs a lot when it comes to real estate, inventory and personnel. There are thousands of local dealers across the country to do it.
But as valuable as it may be to have a vast network of local dealers, this geographic reach gives them extraordinary political power. It is an important building block for state and local politicians. That, combined with the fact that they are a trillion-dollar industry, makes them an effective lobbying force. They argue that the law impedes the ability of entrepreneurs to create new, more efficient business models that better serve consumers.
We have reached out to the National Automobile Dealers Association (NADA), which represents more than 16,000 dealers nationwide, to issue a statement. “The legislature passed the Franchise Act and continues to overwhelmingly support it, which separates the sale of automobiles from manufacturing, prevents monopoly pricing by factories, promotes competition in automobile sales and services, and promotes employment. And we’re keeping our investments local,” he said, NADA’s vice president of communications. Jared Allen. “The franchise system offers these tremendous benefits better than anyone else.”
Some of these claims are undeniable, like the fact that local dealerships create jobs. Others are highly controversial. First of all, there are a dozen automakers in the US, so none of them come close to a monopoly. It’s also not clear how adding intermediaries to the process would lower prices for consumers. Especially given that this intermediary often resorts to a number of tactics that tend to drive up prices. The industry is consolidating, with multi-billion dollar companies now having hundreds of distributors nationwide.
For years, the Federal Trade Commission (FTC), which is charged with overseeing American consumers, has advocated relaxing state franchise laws. This will enable companies like Tesla and Rivian to create new business models that sell directly to consumers. “States should allow consumers to choose not just the cars they buy, but how they buy them,” FTC officials wrote in 2015.
Earlier this summer, the FTC proposed new rules aimed at combating the corruption and skulduggery found at many retail outlets. The FTC said, “As auto prices skyrocket, the European Commission will remove the tricks and traps that make comparability difficult or impossible and cost consumers thousands of dollars in unnecessary junk fees. I am trying,” he said.
New rules proposed by the FTC include a ban on deceptive advertising that sells cars for far less than dealers actually plan to sell. Prohibition of “junk charges for fraudulent add-on products and services that do not benefit the consumer.” All costs and terms under which the vehicle is purchased by the dealer must be disclosed upfront.
Not surprisingly, NADA opposes these proposed rules. “The FTC’s proposed rules would hurt consumers significantly by significantly lengthening trading hours, making the customer experience more complex and inefficient, and driving up prices. It’s an unexamined and unverified obligation to give,” said Jared Allen, NADA’s vice president of communications.
buy a car in this ridiculous market
We turned to long-time auto industry analyst Michelle Krebs for advice. planet money Newsletter readers — about buying a car in this ridiculous, supply-constrained market. “I always tell people to be patient and persistent,” says Krebs. “You have to keep looking and you have to keep shopping. You have to be flexible. You may not find the brand or style of car you want. Most people don’t want to shop any further.It’s 25 miles away, but you may need to go further than that.”
Trying to find a new truck, I spent hours searching online and contacting dozens of dealers all over the west coast, up and down, and inland. I have encountered many of the shady business practices that the FTC is currently trying to ban. I also found an honest “no bargain” dealer willing to sell their trucks at MSRP. The problem was I had to wait at least 6 months for the truck from them to arrive and I didn’t have that kind of patience because my old truck got stolen and I had no car.
Luckily my partner was able to find the exact track I wanted over 400 miles away near her parents’ home in Southern California. The dealer initially wanted to exceed his MSRP by $5,000. But thanks to her hard bargaining (she’s a lawyer), she was able to negotiate just over $2,000. Normally it would be a rip off. But these are not normal times.
Anyway, at least I have the truck again – and unlike the previous one, this one has an immobilizer that might prevent theft.