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Recently, my truck was stolen, forcing me to get some new wheels. And, for the first time in my life, I’ve been looking to buy a new car. The process has involved hours of searching. Painful haggling. And encounters with many dealerships that, quite frankly, have been downright duplicitous. The whole thing has been kind of a nightmare.
Cars are, of course, expensive, especially with the supply chain fiasco creating shortages. But it’s more than that. Shopping for cars is not like shopping for most other products. Unlike, say, computers or refrigerators, cars are typically not sold for one standard price. Ten people could go into a dealership and each pay a wildly different amount to buy the same exact vehicle…..Continue reading….
By: Greg Rosalsky
Source: Inside the rise of ‘stealerships’ and the shady economics of car buying : Planet Money : NPR
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Critics:
In economic theory, car dealerships can be characterized as franchisees and the automobile manufacturers as franchisors. A franchise relationship can be beneficial to both parties, as the franchisee can sell a well-made and attractive product while the franchisor can rely on the franchisee to incur downstream costs and use its local relationships to sell more products and services.
The franchisor can act opportunistically by imposing constraints and burden on the franchisee after the latter has incurred sunk costs, such as investing in physical assets and building up a reputation with customers. The franchisor could for example require that cars be sold at low prices, services be performed for little compensation.
The franchisee could on the other hand act opportunistically by using its local monopoly to perform poor customer service, charge customers more and pass those unnecessarily high costs to the franchisor. Car dealerships have lobbied for regulations that increase the survival and profitability of car dealerships: By 2010, all US states had laws that prohibited manufacturers from side-stepping independent car dealers and selling cars to customers directly.
By 2009, most states imposed restrictions on the creation of new dealerships to compete with incumbent dealerships. All states impose severe limits on the ability of a manufacturer to terminate a franchise relationship. Most states prevent manufacturers from engaging in “quantity forcing” whereby manufacturers require that dealers purchase vehicles that they had not ordered.
Most states limit the ability of manufacturers to discriminate between car dealers (for example, by providing better terms to large car dealers with economies of scale or dealers that provide better customer service). Many state laws impose upon manufacturers the precise terms under which they must compensate dealers for the costs associated with warranty repairs (these can incentivize dealers to increase the price of repairs to customers).
Most state laws require upon termination of a dealership that manufacturers buy back the inventory, special equipment and in some cases pay the rent of the dealer’s facilities. Economists have characterized these laws as a form of rent-seeking that extracts rents from manufacturers of cars and increases costs for consumers of cars while raising profits for car dealers.
Multiple studies have shown that regulations that protect car dealerships increase car costs for consumers and limit the profitability of manufacturers. The issuance of new dealership licenses is subject to geographical restriction; if there is already a dealership for a company in an area, no one else can open one.
This has led to dealerships becoming in essence hereditary, with families running dealerships in an area since the original issuance of their license with no fear of competition or any need to prove qualification or consumer benefit (beyond proving they meet minimum legal standards), as franchises in most jurisdictions can only be withdrawn for illegal activity and no other reason.
This has led to consumer campaigns for establishment or reform, which have been met by huge lobbying efforts by franchise holders. New companies trying to enter the market, such as Tesla, have been restricted by this model and have either been forced out or been forced to work around the franchise model, facing constant legal pressure.
According to a 2023 survey by the Sierra Club, two-thirds of US car dealerships did not have electric or hybrid vehicles for sale. Reasons for this include supply chain difficulties, as well as a need for car dealers to make substantial investments in new employee training and infrastructure to be able to sell, service and maintain electric vehicles.
In the European Union, car manufacturers were permitted from 1985 to 2006 to enter into contracts with car dealerships that restricted what kinds of cars that dealers were permitted to sell. Car manufacturers were able “to impose qualitative, quantitative and geographical restrictions on supply by selling their cars only through a limited number of dealers bound by strict franchise agreements.”
In 2006, the European Commission determined that it was anticompetitive for car manufacturers to prohibit dealers from carrying multiple car brands.Car manufacturers in the European Union are increasingly shifting towards selling cars directly to customers without reliance on independent dealers. Volvo has announced plans to sell all vehicles directly to customers by 2030.
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