Phoenix Center: Changing State Franchise Laws Could Reduce Number Of Dealers And Raise New Car Prices For Consumers
Jefferson City, Mo. – The non-profit Phoenix Center for Advanced Legal & Economic Public Policy Studies today released a new empirical economic analysis of how dealership competition effects new-car pricing, and found that when local dealers compete, consumer prices are driven down by hundreds of dollars per vehicle.
The report, “The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis,” examined more than 250,000 transactions for ten of the most-popular new cars purchased in the state of Texas for the years 2011, 2012, and 2013. The study sought to determine how competition among different dealer franchises for the same automobile model – called “intra-brand” competition – impacts pricing.
According to the analysis, for both Toyota Camrys and Honda Accords, the average sale price was approximately $500 lower in areas where multiple same-brand dealers competed within a 30-mile radius compared to areas where dealers weren’t competing for customers, leading the report’s author to conclude: “More auto dealers means lower consumer prices.”
“This study proves that the car dealer network is the most consumer friendly way to sell and distribute new cars. Missouri’s franchised new-car dealer system provides the best, most efficient and most cost-effective way sell new cars,” said Missouri Automobile Dealers Association President and CEO Doug Smith. The study also demonstrates that the car dealer network works to deliver cars to consumers at a lower price. Without it, Missouri consumers lose out on price competition.”
“When two same-brand dealers compete for the business of a consumer on a car, the bargaining focuses mostly on price,” said study co-author Dr. George S. Ford, Chief Economist of the Phoenix Center. “The data shows that having multiple same-brand dealers in close proximity produces significant price cuts for the consumer. More auto dealers means lower consumer prices.”
And these price reductions represented “substantial relative savings for new-car consumers,” according to the report’s authors.
Study co-author Lawrence J. Spiwak noted that the model is applicable across the United States.
“Laws exist in almost every state governing the retailing of new cars to consumers,” Spiwak said. “These laws have encouraged large dealer networks, which the evidence suggests have led to significantly lower prices for consumers.”
A full copy of the paper, Phoenix Center Policy Paper No. 48, The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis, may be downloaded from the Phoenix Center’s website.
Background Information: The Price Effects of Intra-Brand Competition in the Automobile Industry: An Economic Analysis
· In the U.S., competition among dealerships is made more interesting and arguably more intense by the fact that dealerships are independent franchisees of the manufacturers. Manufacturers do not own dealerships and are mostly prohibited from doing so by state laws. (A discussion of the auto franchising laws is provided by F. Lafontaine and F.S. Morton, PERSPECTIVES 233-250 (2010). See also E.P. Kerrigan, Econ 101: Dealership Supply and Demand, Markets: State Franchise Laws, Dealer Terminations, and the Auto Crisis, 24 JOURNAL OF ECONOMIC DEALER-MAGAZINE, June 2009, http://autostarrealty.com/articles/erin_06-2009.pdf).
· Outside of buying a home, an automobile will be the most expensive item ever purchased by many Americans. Annual transportation expenditures (17.6% of total) are second only to housing costs (33.5% of total) for the average consumer, exceeding food costs by 40% and healthcare expenditures by 150%. (Consumer Expenditures 2013, Economics News Release, Bureau of Labor Statistics, September 19, 2014, http://www.bls.gov/news.release/pdf/cesan.pdf )
· As we all know from personal experience, buying and maintaining a car is a significant challenge. (The Price Effects of Intra-Brand Competition in the Automobile Industry: An Economic Analysis, Phoenix Center for Advanced Legal and Economic Public Policy Studies, March 2015, http://www.phoenix-center.org/pcpp/PCPP48Final.pdf.)
· Our findings suggest that reductions in the number of dealerships are likely to lead to higher prices for new cars. We stress, however, that the dynamics of the automobile industry are complex and our findings shed light on but a sliver of the relevant factors impacting the industry. (The Price Effects of Intra-Brand Competition in the Automobile Industry: An Economic Analysis, Phoenix Center for Advanced Legal and Economic Public Policy Studies, March 2015, http://www.phoenix-center.org/pcpp/PCPP48Final.pdf.)
· Fortunately, the automobile industry is today workably competitive by almost any standard, thereby keeping prices low and quality high. Rivalry in the industry exists at two levels: inter- and intra-brand competition. Inter-brand competition occurs between different manufacturers such as Ford, Toyota, Honda, and others, with each offering differentiated products that attempt to satisfy the varied preferences of consumers. Intra-brand competition, in contrast, occurs among dealers of the same brand and thus tends to emphasize price. Intra-brand rivalry can be fierce: for example, Toyota’s website returns seventeen (17) dealers for the city of Houston, Texas. (http://www.toyota.com/dealers)
· While consumers certainly benefit from inter-brand competition, that competition is of a differentiated-products sort. Intra-brand competition, in contrast, is over homogeneous or near-homogenous goods (e.g., a white Ford Focus SE), so intra-brand rivalry focuses on price. Economic theory suggests and consumer experience demonstrates that more dealers in close proximity mean better deals for consumers. As one industry analyst observed,
“Dealers compete with each other within the brand. One Ford dealer competes with the Ford guy a few miles away, rather than with Toyota or Volkswagen. This intra-brand competition always is on price. The customer runs from one dealer to another dickering for a lower price ….” (J. Flint, Too Many Dealers, Again, WARD’S AUTOWORLD, September 2007, http://wardsauto.com/news-amp-analysis/too-many-dealers-again).
· The franchise system has probably led to a greater number of dealerships—especially for domestic brands—than would a more vertically-integrated structure. In turn, the large numbers of same-brand dealers in many local markets may lead to intense price competition. (The Price Effects of Intra-Brand Competition in the Automobile Industry: An Economic Analysis, Phoenix Center for Advanced Legal and Economic Public Policy Studies, March 2015, http://www.phoenix-center.org/pcpp/PCPP48Final.pdf.)
· Causal observation suggests and basic economic logic predicts that intra- brand competition should lower prices; for all automobiles we consider in our empirical analysis, we find that intra-brand competition does, in fact, lower new car prices for consumers. The price effects of intra-brand competition is relatively strong—at the sample means, moving an intra-brand dealer one mile closer reduces prices by the equivalent of an increase in 35 inter-brand rivals, or about 25% of the inter-brand competitors in the average market. (The Price Effects of Intra-Brand Competition in the Automobile Industry: An Economic Analysis, Phoenix Center for Advanced Legal and Economic Public Policy Studies, March 2015, http://www.phoenix-center.org/pcpp/PCPP48Final.pdf.)
· Benefits of the new-car dealer network in Missouri
· Each of the 381 local new car and truck dealers in Missouri employs an average of 55 workers at each dealership
· Every employee working at a local new car or truck dealership earns an average of more than $50,000 each year
· Local new car and truck dealers generate over $1.04 billion in total payroll to over 20,000 employees across the state each year.
· On average local new car and truck dealers spend $144 million in advertising each year supporting local newspapers, radio and TV stations
· Missouri’s new car and truck dealers purchase $483 million in parts and supplies each year supporting hundreds of other small businesses in local communities across the state
