Why Do Dealers Markup New Cars?

Do you feel ripped off by dealerships every time you walk to buy your next car? You could make a case that the advanced technology and safety features, or even that the dealerships are a little overzealous and greedy. Each factor might contribute to the rising cost of new cars, but the markups have deeper sitting reasons that you should be aware of before dishing out the checkbook or signing the lease.

Legal protection – Eliminating the Competition

In the 1950s, dealerships were having it handed to them. The largest manufacturers at the time, Ford, General Motors, and Chrysler dominated the U.S car market. Manufacturers could easily undermine their own franchise dealers at retail.

Dealerships leveled the playing field by having laws that kept manufacturers from undercutting them and feasting on the whole cake themselves.

These legal protections literally eliminated competition from manufacturers. Daniel A. Crane, an associate dean at the University of Michigan Law School, best described these laws as “crony capitalism” and “naked economic protectionism.”

A lawsuit filed by Tesla is currently trying to overturn these laws in an effort to open and operate its own stores. It could open a can of worms and possibly restore balance in the new car retail market.

Car Dealerships have Supremacy in New Vehicle Pricing

Dealerships enjoy a safety net that protects them from manipulation and strong-arming by car manufacturers. That same safety net also gives them ascendancy, meaning they don’t have to follow the MSRPs of the manufacturers. They can set markups as they prefer.
Obviously, the markups vary depending on various factors. But essentially, the dealership has the discretion to set its markup.
On the flip side, dealerships are sprouting up everywhere, creating a different type of competition. That means you have options. You can check out different sale prices of your preferred car models and find a dealership within your budget. It takes a bit of time, but saves you a ton of money.

Manufacturers are No Angels, Either

OEMs have their fair share of blame perhaps a bit more than meets the eye. They’ve constantly raised their MSRPs for new cars leaving dealerships with no choice but to keep their future allocations.
Previously, dealers could sell new cars for $100 or $500 over cost or sometimes at cost. They preserved their allocations and retained the customer as a new service customer.
The push for OE’s to make direct sales isn’t fully in the interest of customers. Don’t expect OE’s to discount the vehicles just because they’re cutting out the middleman. Instead, they will rake in boatloads more because dealerships don’t get their cut. So, OE’s keep all the money.
Also, OE’s limiting inventory hasn’t done much to stabilize prices. So, you could keep paying more for new cars until OE’s restore supply. The supply and demand issues are squarely on the shoulders of OE’s to solve.

An Outdated Dealer-Franchise System

The dealer-franchise system you see currently dates back to the 1950s. It has outlived most of people that lobbied for it. And like everything else, it’s about time to give it a fresh look. The car market has expanded with multiple players and the competition is cutthroat. An updated system should focus on balancing the playing field for the benefit of consumers.

Like any businessman, dealerships will drive the models that make the most money from markups and services. You might end up with a car you didn’t want shoved down your throat. Equally, dealerships could suppress sales of models that don’t have handsome returns.

A good example is the frustration of electric vehicles by dealerships. Such cars have fewer moving parts, robbing dealerships of opportunities to service and sell parts. Therefore, according to a report released by Consumer Reports, the dealerships discouraged buyers from buying EVs.

You can count on dealers to try and make as much money as possible out of you on new car sales. But platforms built on a passion for the industry and innovation, like markups.org, have made it their mission to help buyers get the best deals possible from the dealerships on the up and up. A quick browse through the platforms’ crowdsourced data shows the extent of the markups and how egregious they can be.

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