The Car Dealership Monopoly: The Case for Competition

Americans feel trapped in the car buying process.

By Denny Han

If you hate the process of buying a new car at a dealership, you’d be in the same boat with many Americans. A survey by Harris Poll found that 61% of Americans “feel like they’re taken advantage of at least some of the time when shopping at a car dealership. And more specifically, a survey from CarEdge.com found that 60% of dealership customers felt that negotiating with a salesperson and the post-purchase paperwork were their least favorite part of the purchasing process.”

According to an Accenture survey, three-quarters of customers said that “if given the opportunity, they would consider making their entire car-buying process online, including financing, price negotiation, back office paperwork, and home delivery.”

Customers have also been frustrated with dealership markups in the wake of post-COVID supply chain issues. A 2022 study shows that 80% of customers paid above MSRP—much to the chagrin of manufacturers like Ford and Hyundai, who fear damage to their brands as a result. However, manufacturers don’t have any real control over these prices because dealerships are independent businesses.

The problem is that dealerships lack real market competition in the US, so they’re in a position to rent-seek.

One example of how they have captured such market power is the fact that every state in the country has implemented laws that prevent or restrict car manufacturers from selling vehicles directly to consumers. A Goldman Sachs report (referenced in an economic analysis paper with the Justice Department’s Antitrust Division) once noted that a build-to-order system instead of a dealership could save new vehicle consumers $2,225 based on an average vehicle price of $26,000 in the year 2000. Some states have also gone so far as to ban direct manufacturer sales of used cars and basic accessories. The Federal Trade Commission has advocated for completely repealing these protectionist policies.

There are also laws that mandate “Relevant Market Areas” (RMAs), which “grant a dealer or group of dealers exclusive territorial rights by preventing the manufacturer from establishing additional dealerships within a given geographical area” and insulate dealers from competition and restrictions on dealer terminations. Dealer termination restrictions often have exceptions for “good cause” like fraud but often don’t include the “manufacturer’s desire to improve the efficiency of its dealer network.”

Such laws originated in the mid-late 1900s, amongst a wave of franchise protection laws like the Automobile Dealer Act of 1956, which attempted to address the disproportionate bargaining power dealerships had against manufacturers. During this time, manufacturers were “able to demand an advantageous agreement because of his superior bargaining power,” and independent dealerships were thus “extremely vulnerable to pressure exerted by the manufacturer to increase car quotas, a maneuver which burdened the dealer with unwanted cars and parts.”

These laws may have enjoyed a better argument back then, but the dealership monopolies they’re protecting today aren’t exactly mom-and-pop operations—as Greg Rosalsky, writing for NPR’s Planet Money, noted, “the industry is seeing growing consolidation, with multibillion-dollar corporations now owning hundreds of dealerships across the nation.” Auto dealerships have become powerful political actors as a result. In 2023, the National Auto Dealers Association (NADA), the trade organization for dealerships and auto franchises, spent over $6 million lobbying just the federal government alone. The industry’s state lobbying efforts in 2023 have also netted legislative victories for new protectionist laws in California and Florida.

Advocates of the franchising system argue that protecting dealers also protects consumers because franchises have incentives to offer valuable services such as repairs and handling recall issues. As dealerships are paid by the manufacturer to handle repairs, they supposedly have an incentive to take the customer’s side, whereas workers hired directly by a manufacturer would be incentivized to minimize such services.

The logic behind this argument and similar defenses of dealerships is debatable—there’s no reason why we can’t establish a legal structure that removes protectionist inefficiencies while preserving the valuable services that dealers offer. As economists Jerry Ellig and Jesse Martinez, writing for the Mercatus Center, pointed out, there are plenty of reasons for companies to voluntarily adopt franchising, exclusive territories, and dealer protections, which, in turn, do increase efficiency and quality for consumers while lowering costs. The free market stands a much better chance at deciding how dealerships, inventory, and car sales ought to be distributed than legislators do, especially in the digital age where responses to consumer demand are faster and more flexible than ever.

The fight against protectionist franchising laws is a tough one, as legislators from both major parties are keen on implementing and preserving them. Tesla, Rivian, and Lucid have successfully challenged such laws and have been able to carve out legal exceptions for EV-only companies. But gas-powered vehicles still make up more than 80% of the car market. As an urbanist, I would prefer that we move away from cars being the dominant mode of transportation in favor of walking, biking, and mass transit, but until we have the infrastructure investments for these things, working-class Americans will still need cars and they need to afford them at fair market value.

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