Asymmetrical Information

I hate car dealerships. Hate Hate Hate. I want to be able to go to a website, select the model I want, the options I want and the color I want. I want there to be one price that everyone is paying that's determined by costs+reasonable markup and not how much the sales manager's going to yell at the saleman if he cuts the price by $500, or how many cars he has to sell this month to get a bonus.
I bet the automakers would like me to be able to do all this as well.

Buying a car is the most unpleasant consumer experience there is, even when it goes well.

This must be a small town vs. big city thing, or something. From where I stand, the dealership at the next freeway intersection ensures that the sales manager will take what I am willing to give or see me walking out that door. In fact, someone WILL see me walking just so I can learn what the real price is. Of course I would love to see them all competing against a Web catalog, whoever owns it. But "one price = cost + reasonable markup" means a monopoly and paying more than [some of us] do now.

About 15 or 20 years ago Porsche considered eliminating its dealer network and selling directly to buyers through company-owned showrooms. I don't recall exactly how Porsche planned to eliminate the dealers, it might have been part of a company reorganization, but in any event it would have been legally possible to do so. As things turned out, as soon as the dealers got wind of the idea they threatened to sue Porsche out of existence and the company quickly dropped the idea. Even if the legal restrictions could somehow be circumvented - as noted, car dealers have tremendous political power - I don't imagine that any car manufacturer would dare flirt with the idea given the fear of ruinous lawsuits.

In any event, car manufacturers might not want to set up company stores even if there were no legal obstacles. There aren't too many examples of manufacturers selling costly products to customers through company stores. Gateway's attempt at doing so was a major flop, and the Apple stores function primarily as showcases for new products rather than as sales outlets.

One could as well say that Polaroid deserves its fate because of its silly decision to manufacture film-based cameras.

Or, more plausibly, one could simply note that the New Yorker rarely publishes anything that demonstrates a grasp of Econ 101, let alone a sophisticated economic topic such as auto mfr/dealer relations.

It pains me to defend car dealers, but part of the reason for their poor image - granted, only a part - is the fact that many buyers cannot grasp the concept of supply and demand. Just because *some* cars can be purchased for well under sticker price does not mean that *all* can. As a result, a dealer who sells a highly desired model for something close to MSRP is not necessarily a crook, but might simply be responding to market forces. For example, the newly redesigned Toyota Camry is in such high demand that there are reports of people following trucks carrying new Camrys to dealerships. You can hardly expect a dealer to sell a Camry for invoice price. On the other hand, supply and demand being what they are you usually can cut a very good deal on a model that's not as popular. For instance, Chrysler PT Cruisers (which sold at a premium when introduced several years ago) can now be bought for the proverbial song.

To be sure, there are some common dealership practices that leave much to be desired. One of the worst is the practice of running "screamer" ads touting unbelieveably low prices. Of course the dealership has only one vehicle selling for that price, and when you get to the dealership it's just been sold.* Not to name names or anything, dealers selling cars made in an Asian country other than Japan are reputed to be especially fond of this tactic. Another big source of controversy involves lowball offers on trade-ins. While this is a problem, I don't necessarily see that company-owned sales outlets would be any better.

* = the price in some sdvertisements includes both a loyalty rebate *and* a conquest rebate. A loyalty rebate applies if you already own a car of the brand you're buying, while a conquest rebate applies if you currently own a competing brand. It's not hard to figure out that qualifying for both types is pretty difficult :)

When the internet was just growing up, Carsdirect.com began selling new cars on the Web. The dealers got together and passed state level laws making it illegal to sell new cars that did not pass through a local dealer thus crippling the direct sales model.

I don't care what efficiencies they may provide. If they were able to block these direct sales through litigation and lobbying, that's good enough evidence that they are evil, inefficient dinosaurs for me.

Until car companies can freely dump dealerships and until Web sales are not constrained to pass through dealerships, I'm going to assume that their harm to us outweighs their putative benefits.

My advice: a) have a short commute and/or live near public transportation (or better yet, do like I do and walk to work) and b) lease your auto. If you do "a" the mileage restrictions on leasing won't present any problems.

I leased a Jetta in February, and it's been the most stress-free car "buying" experience of my life. I simply love it. Anything wrong with the car and they've gotta deal with it. And no hassles about trade ins. Since I don't own the rapidly depreciating hunk of metal, I don't really give a rat's ass about it other than avoiding major damage. I'm paying for 12,000 miles a year, and so far -- half way into year one of the lease -- I've only used 3,000 miles (so, yeah, I'm a prime candidate for leasing). Arguably I paid for too many miles. But it was only a few extra bucks a month to bump up my limit from 10k to 12k -- and boy am I going to enjoy making some major road trips with all the extra mileage I've got in the "bank" with this car that I don't even own...

I knew government had to have SOMETHING to do with it. There's absolutely no other explaination for the way buiying a car through a dealer so flagrantly violates the fundamental laws of economics. (No matter how straightforward one's transaction is, there's no way to complete the purchase of a new car in less than 5 hours. It's positively Soviet in its backwardness. Every time I make an offer, the salesman has to spend half an hour drinking coffee with his boss and pretending they don't already know exactly where the line is drawn between offers they'll accept and offers they'll reject. Once we finally come to an agreement on price, every other employee of the dealership has his own personal unnecessary role in the process, and each one of them requires me to wait. I even have to wait for the finance guy, despite the fact that I'm not financing. And so then, because I haven't gotten any sleep that day because I was stuck in the car dealership, I have to take the night off work, so the process not only costs me money, but it costs me a "vacation" day, despite the fact that I'd rather have root canal work done without anaesthesia than spend a day in a car dealership, so it's certainly not what I'd call vacation-like.)

If they weren't government-protected, there's no way a commission-based salesforce would be able to get away with worse service than you get from the salary-only drones at a big-box electronics store. I'm thus entirely unsurprised to learn that they're big favor-whores in the state legislatures.

Jane, can you show me the studies that show that we conclusively know that the franchise model "works better than company-owned"? You cite one reasonable benefit of the franchise model -- in theory, owners should work harder -- and one touchy-feely one whose economic value is uncertain. But obviously those benefits need to be weighed against the costs of the franchise model, most notably the lack of control and flexibility. If it's so obvious that franchises are superior, for instance, how do you explain the success of Starbucks, which has become the most successful new retail business in the food industry of the last two decades while running only company-owned stores? And why would Starbucks have adopted that model if the franchise model is so clearly superior?

The point isn't that company-owned is necessarily better, but that transaction-cost economics (which is the field that's relevant here) is very complicated, and simply assuming that outsourced relationships are superior to in-house ones is a mistake.

With regard to the specifics of my argument about car dealers, you completely skip over the fact that car dealers only sought legislative protection after Ford and GM alienated them by dumping excess inventory on them. In other words, the "political realities" didn't exist independent of the manufacturers' actions -- the manufacturers' actions brought those realities into being. They chose franchising over the in-house model, and then did not act as good partners in their relationship with their franchisees, which led to the current state of affairs. It's in that sense that they have only themselves to blame.

(By the way, it's not more or less "efficient" in an economic sense to have the cars sit on dealer lots rather than on lots at the factory. The cost of inventory is the same in both cases -- it's just a matter of who has to eat it.)

Back in 1959, the book "The Insolent Chariots" showed how the dealer network is inefficient, expensive, and a ripoff to the car buyer. Go read it, you'll be amazed. Nothing has changed in almost 50 years.

But what's this about dropping a brand? What happened to Oldsmobile and Plymouth, and just recently?

A few somewhat disconnected observations about car dealers and the buying process:

1. The auto industry is somewhat unusual in that manufacturers sell directly to large numbers of retailers (dealers) without going through the middleman/wholesaler level. There are only a couple of exceptions, with large distributors acting as wholesalers for Toyota in the Southeastern states and for Subaru in New England.

2. In most car dealerships the service department is much more of a profit center than the new car sales department. This gives the manufacturers significantly more leverage over the dealerships than the terms of the franchise agreements ostensibly allow. If a manufacturer has gotten too many complaints about a particular dealership, or for some other reason has an axe to grind with the dealership, it can drag its feet in reimbursing the dealership for warranty repairs. Doing so will put a lot of pressure on the dealership and often will force it to be more cooperative.

3. While it's true that customers have no choice but to buy from franchised dealerships, that does not mean they are helpless. Research on a site like edmunds.com will give you a very good idea of what you should be paying for a particular vehicle and will make you a much better shopper. Just remember, as I said in an earlier comment, that the laws of supply and demand have not been repealed; if you want the latest hot models, you'll pay for the priviledge.

bastight and matt have it right. The hassle of buying a new car is almost pure waste. Luckily, it's getting better though. Some dealerships are entering to perform the "go through the motions" level of "service" needed for you to, in effect, buy on the internet. A co-worker recently told me that he bought a new car on the internet, and just had to pick it up at a Dallas dealership. That dealership didn't give any hassle, just told him their costs and their cut, and handed over the car. It was effectively Wal-mart style: sell at min. profitable price and move as much as possible with no commissions.

The car dealership lobby is pure evil, but their grip is weakening.

Just remember, as I said in an earlier comment, that the laws of supply and demand have not been repealed; if you want the latest hot models, you'll pay for the priviledge.

Peter, high demand for a specific model does not explain the huge (and persistent) markup, the unnecessary salesmen, or the long, degrading process. Please, get real.

I'm typically the first person (hah, hah) to explain the hidden economic function of some reviled figure (e.g., explaining why Microsoft "gets to" charge so much despite having "bad software"), but this really is just a legal cartel.

I bought a Honda in NZ last year: Honda owns the dealerships. Vey convenient it proved.

My wife and I both purchased new cars within the past ten months. I bought a Subaru Forester at the end of October, while my wife bought a Mazda3 in March. The purchases were from different dealerships not under common ownership. In each case, the selling price was within $100 of the True Market Value (TMV) price as shown on Edmunds.com for an identically equipped vehicle. There was no long, drawn-out haggling, no "let me run this by the sales manager," no useless add-ons such as paint sealant or fabric protection (known as "mop 'n' glow"), no hard-sell to get us to buy extended warranties, basically no hassle at all. I arranged for my own financing but my wife financed her car through the dealership and it was an easy process. About the only criticism I have is that the offer for my trade-in was a bit on the low side, but valuation of trade-ins is a pretty subjective process and the difference between their offer and my estimate wasn't enough to be a deal breaker.

the legal/regulatory aspect of dealer franchisees is one thing, but from a simple marketing strategy perspective it is a relatively basic decision: high logisitical costs/low product education = indirect salesforce (dealer franchises) whereas low logistical/high product education or differentiation = direct salesforce (company owned stores).

one can see why a porsche might be able to sell direct because it's highly differentiated product necessitates education and the premium price at which it sells can help cover the fixed cost of a dealer owned distribution network.

in the absence of the local auto dealers political power, one might expect the auto industry to potentially shake-out as the furniture industry is currently shaking out. again, low product education/differentiation combined with high logistical costs have caused dealer based networks to evolve. unfortunately, imports are commoditizing the market. low cost manufacturing has emerged and direct sourcing from more sophisticated retailers are causing dealers on every corner to go bankrupt. US based manufactures are attempting to integrate forward into retailing in order to create a brand in order to save themselves from commoditization.

unfortunately, retailers such as pottery barn, crate & barrel, restoration hardware, and williams sonoma are already there in the mid to upper end while target and walmart are there in the lower end. ulimately, i believe manufacturers integrating forward will fail simply due to the economic structure.

however, for the autos, there currently are no national retailers (maybe KMX) and they seem to be politically skilled at presenting such from occurring. the fixed cost investment in establishing the network is large and presents a barrier to entry. the return on investment from selling low margin cars may not be significant enough to attract sophisticated capital in the mass necessary to roll-out a network and, in the Big 3s current situation, they certainly lack the ability to raise that capital.

well, that wasn't as coherent as i had hope. so, expect to see the model continue is my point.

Some of you make car buying way too hard. Figure out what car you want. Pre-arrange financing (you can do it on the web even). Call 3-6 dealerships that you are willing to drive to. Tell them exactly what you want. Ask for their best price. Go to the best price dealer and buy it. It's easy. Tell the winning dealer you are coming and to be ready to close the transaction. Time spent in dealership is less than 1 hour.

I've seen ranges of $4000 on a 25k car doing this. It's the same car, down to the color. I always get a good price, always well below the sticker (10%, sometimes more) for a high-quality brand. Don't buy the car that is in high demand; or do, and be resigned to pay more for it.

Just a side note... McDs did seriously look at becoming a high end cafe, and have done it somewhat successfully in some markets, although it hasn't seemed to take in North America. It's called McCafe and was put into existing stores as a reno. A friend was running the concept in my local region.

As to the dealerships... it helps to pay cash and not have a trade. Simplifies the hell out of the purchase and takes away the dealers ability to screw you. Of course never discuss anything but the price, say you want to leave that for later, so that salesperson thinks that he'll concede a bit and get you on your financing/trade. Then when you get a deal you like, ask if they take Visa or will a certified cheque do? Hilarious look to their face.

Best place to sell a used car: to the staff at a trusted mechanic. We have taken our cars to the same mechanic for 20 years. I beat the hell out of cars and put up rather insane mileage but always get a very good price because the mechanics know exactly what condition the car is actually in and they can do any work for free. It also helps that I drive high end SUVs, so an already decent residual value gets amplified.

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