Kristian Stout on the Hidden Costs of Franchise Dealership Laws
Kristian Stout, ICLE Director of Innovation Policy was quoted in a The Yahoo Autos article about a study finding that state franchise-dealership laws act as a “middleman tax,” adding thousands of dollars to new-car prices by restricting direct sales from manufacturing to consumers. Read the full article here.
State laws requiring automakers to sell cars to customers through franchised dealerships are adding between $3,934 and $4,992 to the transaction prices of new cars, according to the nonprofit International Center for Law & Economics (ICLE). The center calls reliance on franchised dealerships a “middleman tax.”
That effective tax, which is based on average new car prices of $50,000, comes from various inefficiencies in the franchise model, according to the study. The need to maintain inventory adds $1,045 to $1,105 in “carrying costs,” compounded by floorplan interest rates of 6% to 9%, the study claims. Another $1,600 is associated with helping to move that inventory, which isn’t always keyed to customer demand, while overhead for facilities and staff adds about $1,200 to $1,900 in what the study’s authors deem avoidable costs.
“Protecting an incumbent distribution channel is not the same as protecting consumers,” the study reads. “Allowing manufacturers to compete through different models would better align the law with the realities of the modern automobile market.”