Unless you’re a car dealer, you’re probably not a fan of car dealers. We’ve actually told you that more than three-in-four Americans think dealers are lying to them about car prices. Well, get prepared to add a little injury to the insult, because not only are they annoying middlemen we’re forced to deal with by law, a new study claims that the entire model is actually costing customers more money, and that’s before we even get into the markups that are being thrown on cars these days.
Apparently, state laws requiring automakers to sell vehicles through franchised dealers are adding somewhere between $3,934 and $4,992 to the transaction price of each and every car they sell, according to the International Center for Law & Economics, a nonpartisan, nonprofit organization. They call it the “middleman tax,” and it’s exactly as frustrating as it sounds. It’s based on the idea that the average new car costs $50,000 and accounts for a number of inefficiencies that stem from the dealer franchise model.
Right off the bat, to maintain inventory on the lot, dealers need to shell out $1,045 and $1,105 in caring costs,” according to the study, which was first reported on by The Drive. From there, add in interest rates between 6% and 9% and another $1,600 associated with helping move that inventory, which — mind you — doesn’t always match up with customer demand. Then, you’ve gotta consider overhead for facilities, staff and commission, which comes out to be somewhere between $1,200 and $1,900 per vehicle. All of these costs, according to the ICLE, are unavoidable, and they get past onto regular schmucks like you and me.
More than money
There are other, more intangible costs associated with the dealer model as well, according to the study, which builds on a 2000 Goldman Sachs study and further findings from the Department of Justice. Things like market fragmentation play a role. Dealer franchise laws force out-of-state manufacturers into a rigid business model that can potentially implicate the Dormant Commerce Clause of the U.S. Constitution (this goes all the way to the top baby) by burdening interstate commerce. The DCC restricts states from passing legislation that discriminates against interstate commerce, and they’re barred from passing laws that favor in-state economic interests over out-of-state- competitors, according to Cornell’s Legal Information Institute. Basically, it stops the Balkanization of America — as tempting as that may sound right now.
The ICLE’s study also asserts that the dealer model is hurting vehicle innovation. Because cars are becoming increasingly software-defined, over-the-air updates and digital platforms are more important than ever, and the study says the franchise model is “structurally incompatible” with that fact.
Franchise laws like the ones we’ve got today have been around pretty much since cars started being sold to the public in large numbers. They were originally there to help protect independent dealers from unfair competition from the automakers they relied on, according to The Drive.
The thing is, the world has changed a great deal since the early days of the automotive industry, and the ICLE argues that these laws may have very well outstayed their welcome. I tend to agree with that idea.
“Protecting an incumbent distribution channel is not the same as protecting consumers,” the study says. “Allowing manufacturers to compete through different models would better align the law with the realities of the modern automobile market.”
