Kristian Stout Quoted in Jalopnik on How Dealer Franchise Laws Raise Vehicle Prices
Kristian Stout, ICLE Director of Innovation Policy was quoted in a Jalopnik article on how state franchise-dealership laws act as a “middleman tax,” adding thousands of dollars to new-car prices by restricting direct sales from manufacturers to consumers. Read the full article here.
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.
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.
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.”