Inside the rise of 'stealerships' and the shady economics of car buying

Greg Rosalsky

August 30, 2022 / 3:30 am

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.

Economists call this sort of pricing strategy "price discrimination." That's when, instead of charging everyone the same price, sellers charge people different prices based on their willingness to pay. In simpler terms, it means that the seller milks as much money as they can out of you. Not all dealerships engage in this pricing strategy, but many do it aggressively, often with snake oil-style salesmanship, deceptive marketing tactics, hidden fees, and overpriced add-ons, like floor mats, alarm systems, or anti-rust undercoating. Some consumers call the outfits that employ these tactics "stealerships."

The tricky pricing strategy used by dealerships can be maddening for consumers, and I've personally found haggling over the price of a new truck with slick, commission-seeking salespeople to be exhausting (Fortunately, my partner has proved herself to be a talented haggler).

A slew of economic studies has found patterns in who bears the brunt of this pricing strategy. It's not pretty. For example, a number of studies find that dealerships tend to charge people of color more than white folks. Another study finds that older people tend to be charged higher prices than younger people, and that older women tend to be charged the highest price of all.

One study found that dealerships tend to treat a buyer's decision to trade in their used car like a neon sign on their foreheads, flashing, "Charge me more!" That's because trading in your used car, while easier than selling it directly, also fetches less money. Dealerships apparently see this as an indicator that you're either unsavvy or willing to burn cash — so they jack up the price of the car they sell to you. The type of car you trade in also offers a wealth of information on how much they can charge.

In normal times, when supply is ample and dealerships are more worried about getting cars off the lot, it's common for them to charge less than the Manufacturer Suggested Retail Price (MSRP). But with supply-chain problems creating shortages of new vehicles recently, many dealerships have been charging much more than MSRP. Meanwhile, the dealerships that don't add markups to MSRP are seeing their inventory depleted quickly, and often have wait times of months or even years for coveted vehicles.

Michelle Krebs is a longtime automotive researcher who serves as the executive analyst of Cox Automotive, which owns brands like Kelley Blue Book and Autotrader. "This is the first time in my career — and it's a long career — that I've seen most dealerships charging at list price or over," she says. "And it's simply because there's high demand, low inventory, and they can do it." Krebs says she's seen some cases where dealerships have charged buyers literally tens of thousands of dollars over MSRP.

Automakers vs. dealerships

Dealerships are usually independent franchises of their affiliated automaker, which means they are autonomous businesses that can basically do what they want when it comes to setting prices. But many automakers are not happy with their franchises charging crazy high markups. A recent study from the consumer group Growth for Knowledge suggests that excessive price gouging sours consumers on not just a particular dealership, but the car brand as a whole.

At least some automakers know this. Earlier this year, Hyundai Motor Company sent a letter to its dealerships urging them to end deceptive practices, such as advertising a low price online and then charging a much higher price when customers go into the store. The company complained that sky-high markups were "damaging our brands' long-term ability to capture new customers and retain loyal ones."

Likewise, Ford Motor Company urged its dealers to cut down on markups and threatened to cut back on sending them Ford's most coveted vehicles if they didn't. And yet the new Ford F-150 Lightning electric pickup truck and the Ford Bronco are some of the most marked-up vehicles on the market, regularly being priced at much higher levels than what Ford has said they should be sold for. The problem for Ford: dealerships are independent and the Manufacturer Suggested Retail Price is just that, suggested.

Newer automakers like Tesla and Rivian have been trying to build distribution and service networks that jettison the use of independent dealerships. They are building a direct-to-consumer retail model in which consumers custom-design their vehicles on the internet and receive them directly from the manufacturer — without dealership middlemen and exhausting haggling over price with commission-seeking salespeople. For in-person needs, these automakers provide their own dealerships and service centers.

However, there are state franchise laws across the country that protect independent dealerships — and these laws have made it difficult to disrupt the dealership system and offer consumers potentially a better way of buying a vehicle.

A V8 political engine

To be fair to dealerships, they do provide important services. They offer a distribution and service network, which is vital to both manufacturers and car buyers. They offer buyers the ability to check out, test drive, and learn about cars at their facilities, which really do cost a lot when it comes to real estate, inventory, and manpower. If the manufacturer recalls something, there are thousands of local dealerships across the nation there to fix the problem. They also, of course, create tons of jobs in local communities.

But, while having a sprawling network of local dealerships may be valuable, this geographic reach also gives them outsized political power. Spread out all over the place, local dealerships are important constituents for a whole slew of federal, state, and local politicians. That — together with the fact that they're a trillion-dollar-plus industry — makes them an effective lobbying force. And opponents argue that the protective franchise laws they've worked to erect and maintain thwart entrepreneurs' ability to create new, more efficient business models that better serve consumers.

We reached out to the National Automobile Dealers Association (NADA), which represents more than 16,000 dealerships across America, and they provided a statement. "State legislatures passed franchise laws — and continue to overwhelmingly support franchise laws — to separate car sales from manufacturing, prevent monopoly pricing by factories, promote competition in auto sales and service, and keep jobs and investment local," says NADA Vice President of Communications Jared Allen. "The franchise system delivers these tremendous benefits better than anyone."

Some of these claims — like the fact that local dealerships create jobs — are undeniable. Others are highly debatable. First of all, there are more than a dozen automakers in the United States, so no single carmaker comes close to being a monopoly. And it's not clear how adding a middleman to the process reduces prices for consumers, especially when you consider that this middleman often resorts to a slew of tactics that tends to raise prices. Many of these dealerships, by the way, are not mom-and-pop shops; the industry is seeing growing consolidation, with multibillion-dollar corporations now owning hundreds of dealerships across the nation.

For years, the Federal Trade Commission (FTC), the agency tasked with looking out for American consumers, has advocated relaxing state franchise laws so that companies like Tesla or Rivian can create new, direct-to-consumer business models. "States should allow consumers to choose not only the cars they buy, but also how they buy them," FTC officials wrote in 2015. But franchise laws continue to protect the dealership model and thwart innovation.

Earlier this summer, the FTC proposed new rules aimed at combating the graft and skullduggery found at many dealerships. "As auto prices surge, the Commission is seeking to eliminate the tricks and traps that make it hard or impossible to comparison shop or leave consumers saddled with thousands of dollars in unwanted junk charges," the FTC said.

The new rules the FTC proposes include a ban on deceptive advertising in which dealerships market cars as way cheaper than they actually intend to sell them for; a ban on "junk fees for fraudulent add-on products and services that provide no benefit to the consumer"; and a requirement that dealerships disclose upfront all costs and conditions for buying their vehicles.

NADA, not surprisingly, opposes these proposed rules. "The FTC's proposed rules would cause great harm to consumers by significantly extending transaction times, making the customer experience much more complex and inefficient, and increasing prices, and NADA again urges the FTC to go back to the drawing board before forcing implementation of a series of unstudied and untested mandates that will have such significant negative impacts on customers," says NADA Vice President of Communications Jared Allen.

Buying a car in this bonkers market

We asked Michelle Krebs, the longtime automobile industry analyst, if she had any advice for me — and, more importantly, you, our cherished Planet Money newsletter readers — about buying a car in this bonkers, supply-constrained market. "I always say pack your patience and persistence," Krebs says. "You have to keep looking, keep shopping. You have to be flexible on your choice. You may not get the brand or car style you want. And, importantly, expand your geographic search. Most people don't want to shop more than 25 miles away, but you may need to go farther than that."

In trying to find my new truck, I spent hours searching online and corresponding with dozens of dealerships located up and down the West Coast and farther inland. I found some trucks that were literally priced $10,000-$15,000 over MSRP, and I encountered many of the shady business practices that the FTC is now trying to ban. I also found honest, "no haggle" dealerships willing to sell the truck at MSRP. The catch: I'd be forced to wait at least six months for a truck from them to arrive, and with the theft of my old truck leaving me without a vehicle, I didn't have that kind of patience.

Luckily, my partner ended up finding the exact truck I wanted, located more than 400 miles away, in Southern California, near her parents' house. The dealership initially wanted $5,000 over MSRP. But thanks to her fierce negotiations (she's a lawyer), we were able to talk them down to only $2,000 over. In normal times, that would be a rip-off. But these are not normal times.

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