The dealership model gives car buyers less market power, but it could change : The Indicator from Planet Money Let's face it: buying a new car sucks. From the hidden dealership fees to the reams of paperwork, it just seems harder than it should be. Well, economically speaking, it is – and today, we explain why.

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Economists hate car dealerships too

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Car dealers don't have the best reputation. One Gallup poll ranked them as the second least honest profession after lobbyists.

ALANA SEMUELS: But here in the U.S., if you want a new car, you have to go through a car dealer, as I recently learned.

MA: Alana Semuels, senior economics correspondent at TIME, welcome back to the show. And yes, please tell us about your recent car buying experience.

SEMUELS: So I thought I was a good negotiator, and then I bought a new Subaru Forester in August. August, by the way, was not a good time to buy a car because there's just been extremely low inventory all year.

MA: Right. Right. And that was caused in part by supply chain issues with the semiconductor and other parts shortages. And as recently as September, Kelley Blue Book says people are paying on average $48,000 for a new car.

SEMUELS: OK. I did not pay that much, but I did pay $3,000 over the sticker price.

MA: Whoo (ph). Alanna, I thought you were never supposed to pay over sticker price.

SEMUELS: Yeah, you're not. But because of the low supply and the current market, my choices were paying over sticker price or not getting the car. And Adrian, that's not all. When I sat down to sign the final papers, the dealership added on $800 in extra fees, including $199 for this security feature called VIN etching that I didn't even want in the first place.

MA: VIN etching? Woof.

SEMUELS: Woof is right. But Adrian, you know what? I blame the government because unless you're buying an electric car - more on this later - state laws require consumers like me to buy a new car from a dealership.

MA: This is THE INDICATOR FROM PLANET MONEY. I'm Adrian Ma. Today on the show, why Americans still have to go through car dealerships to buy almost all new cars and why many economists argue that car dealers have too much market power.


SEMUELS: Adrian, as you probably know, car dealerships weren't actually very fun places even before the pandemic. Lots of salespeople are, shall we say, pushy.


UNIDENTIFIED PERSON #1: Turn November into Go-vember (ph), like no payments for 90 days, no money down, low interest...

UNIDENTIFIED PERSON #2: Get huge, model year savings before they're gone.

SEMUELS: And there's a reason for that. I talked to this guy, Dan Crane, who says dealers are trying all sorts of moves to get you to buy a car.

DAN CRANE: An aggressive sales tact would be like, today is the last day of the month. If you don't leave with a car today, you're not going to be able to get a better deal.

SEMUELS: So Dan is a law professor at the University of Michigan, and he studies antitrust. He says that car dealers' aggressive tactics come from the way that auto sales are regulated in the U.S.

MA: So this goes back to the early 20th century when cars made their debut. Emerging car companies needed to sell each car as soon as they rolled off the line. That way, they actually had cash to make more cars. So these companies started selling cars to franchise dealers who would pay the company upfront and then turn around and sell the cars to consumers.

SEMUELS: That worked for a while, but in the 1930s and '40s, the big three car manufacturers - that's your General Motors, Ford and Chrysler - they were getting pretty powerful. They started pushing dealerships around, offering ultimatums on how many cars they could buy and sometimes even competing with them directly by setting up their own car shops nearby.

MA: And in response, what these mostly mom and pop car dealership operations did was they banded together, and they lobbied state legislatures to pass laws for them, pass laws that prevented car manufacturers from selling directly to consumers. Instead, to this day, manufacturers have to sell their cars through franchised car dealers.

SEMUELS: That's right. And even though these car dealers are not really mom and pop operations anymore, these franchise laws are still around. And Dan says they help explain why so many people's experiences were as frustrating as mine.

CRANE: The reason this is related to the franchise system is because what the dealers do is they buy inventory from the manufacturers, and then they try to sell it to you. And so they're trying to sell you what they've got on the lot or what they can easily get. And they use commission salespeople who only make money if they sell you a car.

MA: So this is a very different model than, say, if you're going to go buy an iPad from Apple, right? You could go into a store which is run by Apple, and they have salespeople there that are there to, you know, tell you about the products. But they don't necessarily care if you buy an iPad from them or from Apple's website or from, like, a Verizon store.

SEMUELS: Even though I went online and chose a car and features I wanted on my car, Subaru's website kept sending me to a local dealership. And they would inevitably tell me that they didn't have the model I wanted, but they did have something else, something that was of course more expensive.

MA: Now we should add, the dealerships argue this is a consumer-friendly model. So the National Automobile Dealers Association, they say that dealerships are good at meeting buyers where they want to be, whether it is online or in person, and they allow consumers to negotiate and possibly bring down the price.

SEMUELS: But, you know, Dan Crane and I both had similar experiences where we sat down to sign the papers for the car, and all of a sudden the dealership added on all these fees that we felt like we couldn't turn down.

CRANE: They've unfortunately gotten in the habit of often trying to slip things in under the rug. I bought multiple new cars over the last, you know, 20 years. Almost every time I've done that, I have felt used coming out of it.

SEMUELS: And one of the reasons that happens is that dealers know that consumers don't have many other places to go to buy the product they want, which in America is actually pretty unusual.

CRANE: The key idea here is that for most kinds of products, the government doesn't pick kind of winners or losers as the distribution models - pretty unusual in the car context for the government to be saying a company cannot sell and service its own vehicles, particularly when they have legal obligations to provide warranty reimbursement and to handle recalls. I think it's a very, very odd situation.

SEMUELS: And would you call that anti-competitive or what would be, like, the economic term for that, would you say?

CRANE: There's a very, very broad consensus that these laws are anti-competitive insofar as they're protecting the dealers from a kind of competition that is beneficial to society.

MA: So usually when you talk about antitrust and competition, you often hear complaints about one huge company having too much power, right? Think Amazon's e-commerce business. But here, the laws have created a situation where thousands of small companies have what economists like Dan say is too much market power.

SEMUELS: Dan really hates this system. He's become one of its most vocal critics. Last year, he signed a letter alongside 74 other economists and law professors, including a Nobel laureate in economics.

MA: The letter argued banning electric carmakers like Tesla from selling direct to consumers was basically interfering with the market to protect special interests. Dan has been involved with the issue since 2014 when he read about Tesla trying to sell electric vehicles direct to consumers and dealers trying to shut them down.

SEMUELS: Aside from economists, Dan has allied with strange bedfellows, like the Koch brothers and the Sierra Club. The Sierra Club supports direct sales because they want to increase electric vehicle adoption. And the Koch brothers, they just don't like the excess regulation.

CRANE: Yeah. What's really been surprising to me is how broad the coalition is supporting the right of a car manufacturer and a consumer to have a direct transaction.

MA: But even as Tesla wins state by state victories which allow it to sell direct to consumers, most people still have to buy cars through dealers - most people who, you know, don't want a Tesla anyway.

SEMUELS: Right. I thought I could maybe wait it out until these laws went away. But it turns out that dealers have been able to prevent states from getting rid of franchise laws entirely. They're just granting exceptions for electric car manufacturers like Tesla. But buy a car with an internal combustion engine like I did, and you still have to go through a dealer because of franchise laws.

MA: As long as there are gas powered cars, Dan says there will probably also be car dealers.

SEMUELS: And consumers need to educate themselves on extra fees like VIN etching that can get tagged on because as hard as it may feel, you can say no. By the way, the dealer did not actually etch the VIN number on my window that he charged me $199 to etch.

MA: What?

SEMUELS: Yeah. They called it, quote, "human error."


MA: Today only - this episode was produced by senior producer Viet Le with engineering from Maggie Luthar. Dylan Sloan checked the facts. Kate Concannon edits the show, and THE INDICATOR is a of production of NPR-R-R.

That was, like, monster truck rally voice.

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