A new study discovered by Drives put a number on what car buyers have long suspected: the franchise dealer model adds thousands to the price of a new car. International Center for Law & Economics estimates that state laws requiring automakers to sell through independent dealers add between $3,934 and $4,992 to the average transaction price of a $50,000 car. The researchers call this a “middleman tax” – a surcharge that is not imposed on steel or silicon, but is a legal protection against aging distribution channels.
Inventory alone accounts for $1,045 to $1,105 of the markup. Dealers had to keep dozens of vehicles, paying interest rates of between six and nine percent while the cars gathered dust. Another $1,600 flowed from the industry’s “make-to-stock” model, which encourages misallocating inventory into lots and forcing manufacturers to spend money on incentives. Overhead costs for a large showroom and assigned sales staff add $1,200 to $1,900 more. None of these fees provide any value to the person writing the check; they just add additional costs to the price of the new car.
Franchise laws date back to the Great Depression, when small grocers needed protection from Detroit’s giants. “Protecting existing distribution channels is not the same as protecting consumers,” the study said. Tesla proved the direct sales model could work, and new brands like Scout are now facing lawsuits for trying the same thing. Kristian Stout, ICLE’s director of innovation policy, puts it plainly: “The policy principle is simple: enable consumers to benefit from competition. States should not mandate a single distribution architecture when many models can compete to serve consumers.”
Removing these mandated middlemen would lower car prices without touching a single bolt on the assembly line. But don’t hold your breath. Traders spent a lot of money lobbying the statehouse, and lawmakers who received their contributions showed no interest in a $5,000 tax cut that voters barely noticed. Until this changes, Americans will continue to pay more for the privilege of haggling with a salesman.
