When you think about it, this is a remarkable news item: Ford and GM have threatened sanctions on their dealers who, because the manufacturers themselves produce fewer cars, charge more to customers than the manufacturer’s suggested retail price (MSRP or “sticker price”). GM called them “bad actors.” Other car manufacturers have warned their dealers. (See “Ford and GM Warn Dealers to Stop Charging So Much for New Cars” Wall Street Journal, February 9, 2022.)
Except for the saints, who are not many, sellers try to charge as much as the market will bear and buyers to pay as little as possible. Irrespective of the MSRP, which serves merely as a focal point, a market price is generated that equalizes quantity demanded and quantity supplied (in each sub-market, by brand, model, and trim). Until about one year ago, the final price paid in nearly all sales was below the sticker price.
Because of lower car demand at the height of the pandemic and then of the so-called chip “shortage,” car manufacturers reduced their production. They could possibly have maintained it, but at much higher costs, notably by previously carrying higher stocks or by bidding up prices of the microprocessors available on the market. Not all producers of goods containing microprocessors reduced their production. Car manufacturers obviously believed that any alternative solution would reduce their profits more than cutting production. If marginal cost is higher than marginal revenue, a producer reduces his production: it’s economics 101.
Reduced supply probably allowed manufacturers to charge to their dealers higher prices than they would otherwise have charged. To which extent they did it, I don’t know, but what we know is that many dealers, receiving fewer cars, were able to sell them at higher prices because customers bid up the prices. If the salesman thinks that a customer is willing to pay more, he will not accept a lower price from another customer.
The reasons given by manufacturers to prevent dealers to let customers bid up car prices is apparently that it is bad for the brand reputation and will alienate customers. The brand justification is only an excuse, or it collapses into the alienation claim. If higher prices negatively affected brand reputation, lower prices would positively affect it. So why don’t the manufacturers reduce their prices to dealers? Indeed, why didn’t manufacturers cut them earlier? High prices as such are obviously not bad for a brand, otherwise BMW and Porsche would be in disrepute.
In a free society, the manufacturers or the dealers or both will let consumers bid up the prices if the cars get scarcer (just as their competitors will bid them down if abnormal profits are realized). This is just a particular instance of a general phenomenon: the market is a continuous auction in which every consumer ends up getting what he wants if nobody else wants it more.
The second justification—that higher prices will alienate buyers—is as suspicious as the first one. Why aren’t buyers antagonized by any price higher than zero? More importantly, one would think that, at least in a free society, customers would be more antagonized by the shortages, the queues, and the arbitrary allocation that follow from keeping prices below their equilibrium level.
On a free market, some dealers can of course choose, for reasons of personal ethics, to eschew profits by selling some cars at lower prices than what they can get. We can even imagine some nice and saintly consumers who would choose not to buy the cars they want in order to leave them for somebody else. But the generalization of such behavior is unlikely—“unsustainable” as today’s cognoscenti would say—in a society of equally free individuals. Some will want to sell high (so-called “price gougers”) or to bid up prices to get what they want (egoistic consumers). In a free society, nobody would be forced to buy high and sell low, or be considered anti-social if he buys low and sell high.
Is it possible that we now live in a society where a socialist culture is so widespread that producers and consumers all prefer waiting lines and that formal government price controls are not even necessary? The executives of Ford and GM seem to have descended to the level of the postal inspector who, during the worst Covid shortages created by government price controls, justified the arrest of a “price gouger” (who at least had some supplies to sell) by declaring that
the conduct charged in the complaint is reprehensible and against our most fundamental American values.
READER COMMENTS
Chris Stucchio
Feb 14 2022 at 7:15am
There’s a really important fact about this situation that your analysis is glossing over.
This is technically true as written but it also glosses over the most important bit: Ford is legally forbidden from selling directly to consumers at MSRP (or any other price) in most states. This leads to crazy situations – e.g. the only place in New Mexico you can buy a Tesla is on an Indian Reservation not subject to this law.
Moreover, it’s worth recognizing the perverse incentives this bit of crony capitalism creates. Car dealerships don’t have much of a brand. I’ve entirely forgotten the name of the dealership where I bought my car, but I sure remember it’s a Toyota Corolla.
You don’t need “socialism” to explain Ford’s actions. Ford simply doesn’t want to pay the cost in branding – even if it is small – to increase profits for government mandated middlemen.
Pierre Lemieux
Feb 14 2022 at 10:39am
Chris: Two points. First, your second paragraph is a good reminder that, in some states, manufacturers are forbidden to sell directly to consumers. However, if I am not wrong, it is a minority of states. Moreover, you would normally expect Ford and GM to use retail intermediaries, as is common in other industries: that’s the benefit of specialization and the division of labor. Of course, technology may be changing costs, and selling directly should not be forbidden: economic freedom is the only to discover what is efficient and what is not.
Second, regarding your last paragraph, I would be surprised if Ford and GM left money on the table in their brand-support expenditures. Perhaps, as you suggest, their management is not socialist, but if socialism culture is widespread in the population, they would behave “as if” they were socialist in order, indeed, not to leave money on the table. In other words, either we assume that their management is “corrupted” by socialism, with the result that they ignore prices and do leave money on the table (the possibility I raised in my post); or else, we don’t assume this, and a corollary is that they don’t leave money on the table.
Matthias
Feb 19 2022 at 7:36am
Not many companies go bankrupt, but the details of bankruptcy law still have a big impact on the balance of power between equity holders, creditors and management.
Similarly, in the absence of a low demanding separate dealerships you might still see car companies using dealerships. But that doesn’t mean that the law doesn’t alter the balance of power.
Keep also in mind that specialisation and division of labour mostly applies between humans. How many different things a company wants to do is a more complicated question. And only partially dependent on technology.
Mr. M3
Feb 19 2022 at 2:31pm
This is factually incorrect fewer then 10 states allow direct sales. In fact as of 2021 only 10 states have introduced bills to allow direct sales and 5 have it on the books. Furthermore the point tends to stand this is damaging for the brand by allowing dealerships to charge over MSRP. Scour the web and you will find lots of individuals cancelling car orders with manufacturers due to dealer upmark and taking business to other brands. This is all free market. And the dealerships protecting their brand is also FREE MARKET the government is not getting involved here.
Pierre Lemieux
Feb 21 2022 at 4:48pm
M3: A link below (scroll down the comments) strongly suggests that about 10 states have no restrictions.
Jon Murphy
Feb 14 2022 at 8:14am
I agree with Chris’s comment above.
It’s been a while, but if I recall correctly, the agreements between dealers and manufacturers limit the price dealers can take.
Jon Murphy
Feb 14 2022 at 8:16am
If I am wrong in my recollection that the agreement between manufacturer and dealership limit prices, someone please correct me. I’m going off memory of a research project from a decade ago.
Pierre Lemieux
Feb 14 2022 at 10:48am
Jon: You may be right and if you are, this would at least partially change my analysis (and I would like to know that I am wrong). However, I haven’t seen anything to the effect that Ford or GM were invoking their contractual agreements. My understanding, on the contrary, is that the Manufacturer’s Suggested Retail Price is nothing but suggested. In fact, manufacturers are probably forbidden by antitrust laws or regulations to impose a price to retailers.
Thomas Lee Hutcheson
Feb 14 2022 at 10:51am
The analysis leaves out the state laws that prevent manufacturers from selling directly and setting profit maximizing prices directly.
Jose Pablo
Feb 15 2022 at 2:55pm
This is a very relevant issue, probably at the core of the whole “malfunctioning” as Thomas points out.
Ben Y
Feb 14 2022 at 8:06pm
The vast majority of states do not allow direct sales.
MSRP is indeed suggested and not required due to anti-trust laws, but they can terminate the dealer contract, making it effectively required.
Manufacturers like to maintain pricing for brand consistency. If the same model sells for less a year later, the previous years customers would be upset. So they prefer it this way.
Pierre Lemieux
Feb 15 2022 at 3:33pm
Ben: Are sure it is “in the vast majority of states”? How does Tesla sell all its cars, then?
Your last paragraph is interesting. But whatever manufacturers would like is less important than the constraints of competition. They may worry that customers who bought a car last year are not happy that their navigation system is not as convenient as in the new models and that therefore the new buyers pay a higher real price, at equal quality, for their cars), they can’t do anything about it or they will be undercut by competition.
Dylan
Feb 16 2022 at 11:16am
29 states have restrictions on selling DTC of which 16 have complete bans, with another 13 having a specific exemption for Tesla, but ban other companies from DTC.
https://morningconsult.com/2021/03/22/electric-vehicles-direct-sales-dealerships-evs/
Pierre Lemieux
Feb 17 2022 at 9:11am
Thanks, Dylan, for this reference. Do you know why your numbers imply that 21 states are free while the Morning Consult data say 22. Is it that they add DC?
Mark Brady
Feb 14 2022 at 10:55pm
Pierre writes, “This is just a particular instance of a general phenomenon: the market is a continuous auction in which every consumer ends up getting what he wants if nobody else wants it more.”
That’s not correct. I suggest that it would be much better to say that the market is a continuous auction in which every consumer ends up getting what he wants if nobody else is prepared to pay more.
robc
Feb 15 2022 at 9:10am
I get the distinction you are making, but wouldn’t the concept of revealed preference state those are the same thing? You may say that you want it more, but if you aren’t willing to pay more, you are revealing that you don’t really want it more.
Mark Brady
Feb 15 2022 at 11:53am
An individual’s demand for any good, and thus the market demand for that good, reflects the extent to which that individual is willing and able to buy the good. In other words, it depends on his preferences (or tastes) and his income.
Jon Murphy
Feb 15 2022 at 12:39pm
Right, but that’s not too important here. Pierre is discussing market transactions. So, we can reasonably interpret the market exchange as the product going to the person who wants it most given the viable alternatives.
Jose Pablo
Feb 15 2022 at 6:15pm
Your willigness to pay includes your capacity to do so. There is “no willigness” if you don’t have the money to pay. So adding “and able” or “and his income” is redundant.
[Willigness: the quality or state of being prepared to do something; readiness.]
Mark Brady
Feb 15 2022 at 8:37pm
Jon Murphy writes, “Right, but that’s not too important here. Pierre is discussing market transactions. So, we can reasonably interpret the market exchange as the product going to the person who wants it most given the viable alternatives.”
You’re being too kind to Pierre! The irony is that I can imagine either you or Pierre taking someone to task who did not make this explicit!
Jose Pablo writes, “Your willi[n]gness to pay includes your capacity to do so. There is “no willi[n]gness” if you don’t have the money to pay. So adding “and able” or “and his income” is redundant.
“[Willi[n]gness: the quality or state of being prepared to do something; readiness.]”
My phrasing is standard and for good reason. It makes it clear that buyers demonstrate that not only that they want the good but are also prepared to put their money where their mouth is.
Cowen and Tabarrok in Modern Principles explain that “The quantity demanded is the quantity that buyers are willing and able to buy at a particular price.” Emphasis added.
Jose Pablo
Feb 15 2022 at 2:37pm
“… and will alienate customers”
This reason is particularly nonsense.
If the “alienated customer” is the one not getting a car; the same number of customers will be alienated no matter the price. By this definition of “alienated customer” the key variables are the number of cars available and the number of cars demanded. The price only serves to decide who are the customers alienated, but not the number of customers alienated. And as you pointed out this is pure micro. It is happening every day in every product and service market.
To say that the “customers not willing to pay a higher price and so not getting the car” have “more alienation” than the “customers not getting the car despite the fact that they were willing to pay a higher price” (as it would be happening if the price increase is not allowed) is pretty arbitrary.
But, maybe the car manufacturers are being rational (as opposed to “socialist”) in this one. I have no idea how this work in practice (maybe someone can clarify) but it the manufactures have already “agreed” a given price with the dealers and all the benefit of the higher price at the dealership is going to the dealer then it could make sense for the car manufactureres to forbid this practice.
[Another issue to be discussed is why is illegal for car manufacturers to sell cars directly to the public. That seems pretty “socialist” too]
Pierre Lemieux
Feb 15 2022 at 3:24pm
Good points, Pablo. On your penultimate paragraph, even if dealers and manufacturers were completely free to agree on rules to “share” the profits among themselves (no antitrust laws and such, no ban on direct sales, etc.), it is not clear if it would be rational for manufacturers to try and prevent dealers’ “scalping.” Only markets can make such complex calculations in a context of diverse circumstances, changing technology, etc.
Your last point is important, especially if, as Ben Y says above, direct sales are forbidden in “the vast majority of states.” Mind you, if that is true, I wonder how Tesla sells its cars.
And I agree that more analysis is needed to get a better picture of the part of profit maximization and socialist hang-ups in the manufacturers’ behavior.
Jose Pablo
Feb 15 2022 at 5:24pm
Apparently, Ben Y is right.
https://en.wikipedia.org/wiki/Tesla_US_dealership_disputes
“Forty-eight states have laws that limit or ban manufacturers from selling vehicles directly to consumers”
It seems to be the case that what Tesla have in many states are “showrooms” that can answer your questions on prices or selling you a car. The actual selling can only take place in a state allowing that or in Tesla webpage (maybe regulated by Federal Law?)
Which I found striking is Tesla caution in its own webpage:
“Automotive franchise laws were put in place decades ago to prevent a manufacturer from unfairly opening stores in direct competition with an existing franchise dealer that had already invested time, money and effort to open and promote their business. That would, of course, be wrong, but Tesla does not have this issue. We have granted no franchises anywhere in the world that will be harmed by us opening stores.”
Why this is a question to be regulated by law instead of a matter of a free contractual agreement between the car manufacturer and the authorized dealership is a mystery to me.
By this same reasoning the law should prevent the car manufacturers reaching an agreement with any new dealer once there is an agreement in place with the first dealer in that state (or “commercially relevant area”)
Jose Pablo
Feb 15 2022 at 5:26pm
* .. That can not answer your questiont on prices or selling you a car …
Pierre Lemieux
Feb 16 2022 at 9:26am
Interesting points, Jose.
GL
Feb 15 2022 at 5:59pm
The price increases between used and new cars is very different at this moment. There is an opportunity for arbitrage here (wrong use of the word, but close enough). As long as you’re patient with delivery times, you can sell your used cars (up~40%) and buy new cars (up ~10%).
My very recent (read: ongoing) experience in the used/new market:
I just sold all my old cars (craigslist), some for more than I paid, and replaced them with new. All the local dealers (Seattle area, Ford and Subaru) were charging ~$6k for “dealer markup” (i.e. above MSRP), but after contacting about a dozen dealers across the state, and providing them with the custom orders I made at the manufacture’s website, I was able to get $1k under MSRP. Granted, some of them literally laughed at me, but persistence pays. And all from the comfort of my house.
Pierre Lemieux
Feb 16 2022 at 9:36am
GL: Interesting. I think the word arbitrage is valid: you sell a good (used car) for a high price on a market and you buy a substitute (brand new car) at a low price out of equilibrium on another market.
Jim Matthews
Feb 19 2022 at 6:37am
It’s a Free market if dealerships are unsupported by taxpayer subsidy and the buying public has alternative purchasing options.
In practical terms, Capital is in collusion against the interest of the Consumer (typically an individual) using State power to enforce Cartel restrictions.
Casting it in terms of (horrors) Socialism is laughably perjorative.
Matthias
Feb 19 2022 at 7:42am
The article is a bit disingenuous:
Humans have a strong status quo bias and the focal point of MSRP is strong.
So eg Porsche has always been more expensive, so it’s not a big deal that it’s still expensive now.
See also the strong support amongst the general public for anti price gouging laws. Or the reluctance of super markets to raise prices for toilet paper; instead they largely went with empty shelves and limiting how much each customer was allowed to buy.
Brett
Feb 19 2022 at 10:45am
Your article does not lay out in detail what the dealers are doing.
In Fords case, its the Bronco and Lightning in particular. Imagine you ordered a Bronco over a year ago. Once you selected all your options the price is $55,xxx, plus tax, tag, doc fee etc. Now the dealer is telling you it has arrived, but unless you are willing to pay a $10k or 20k market adjustment charge, your Bronco will be sold to someone else.
Now as far as the Lightning, you put a deposit down but now the dealer says that unless you sign a paper stating that you will pay the market adjustment upon delivery, your reservation will be canceled and transferred to someone who will.
Dealers that are not charging a market adjustment are being flooded with orders, but there is no way Ford will allot 1200 Broncos to a backwoods Ford dealer in Iowa or wherever.
So I can see Fords point.
AB13
Feb 20 2022 at 7:05pm
I would agree that this was part of what caused the response by the vehicle manufacturers. People would configure their vehicle online and place a deposit for a vehicle. The price as configured was shown to them during the order page. Then they would receive a VIN number when the order was in production. But after going to pick up the vehicle, the price was adjusted on them by the dealer with a markup. That’s what many were complaining about, since they were shown a price during the deposit stage, but the dealer didn’t keep that price. Various Ford Mach E buyers used Twitter to complain to Ford about this issue, which did lead to the response from Ford.
This isn’t the same as someone just showing up on the lot and trying to buy whatever was on the lot, because they could see the pricing that day before placing any deposit.
Pierre Lemieux
Feb 26 2022 at 11:01pm
AB13: You have references (and links) to price changes after a contract was signed? I don’t find that anywhere. For example, read today’s story in the Wall Street Journal at https://www.wsj.com/articles/a-new-brand-of-sticker-shock-hits-the-car-market-11645851648?mod=hp_lead_pos5.
Pierre Lemieux
Feb 26 2022 at 11:00pm
Bret: You write:
Of course, a price below the market price will always create queues. Not surprising.
You have references (and links) to price changes after a contract was signed? I don’t find that anywhere. For example, read today’s story in the Wall Street Journal at https://www.wsj.com/articles/a-new-brand-of-sticker-shock-hits-the-car-market-11645851648?mod=hp_lead_pos5.
Craig
Feb 20 2022 at 3:26pm
Now reconcile this with your position vz Amazon and the likes of etailers like me who’d love to do the reverse….charge less than Amazon. You seem perfectly ok with a manufacturer/wholesaler to make sure its distributors only charge a certain high retail price sufficient to cover Amazon’s ginormous opex
But now, in reverse, you don’t want the manufacturers to be able to impose a maximum resale price.
Pierre Lemieux
Feb 21 2022 at 4:57pm
Craig: I have nothing against anybody imposing any maximum or minimum price in a contractual relationship. I have something against against the socialist argument that queues are better than free-market allocation.
Pierre Lemieux
Mar 3 2022 at 2:54pm
This is incorrect, Craig. Like liberal economists, I think that Amazon and its resellers are free to agree to anything they want, and so for car manufacturers and dealers. I am against any government interference in either case, including so-called antitrust laws.
Jack sorek
Feb 20 2022 at 5:24pm
Author missed the part where the dealers were asking double the MSRP for hot models and the companies came down on them with sanctions because this pricing is unreasonable. Certainly not socialized pricing. Asking a few thousand over blackbook or MSRP… totally OK
Pierre Lemieux
Mar 3 2022 at 2:56pm
Jack: Who decides what’s reasonable? The buyer and the seller, or some third-party? A philosopher-king? That’s the collectivist approach.
Comments are closed.