Why are cars so cheap?

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When Mrs. Guesswork ordered her Toyota Prius, almost a year ago, there was a six month wait list (now down to a few weeks). Despite that, the dealer charged her exactly MSRP and didn't indicate in any way that if we offered him more money we could get the car sooner. This isn't true just for the Prius. Lots of "exclusive" cars like the Audi RS6 and various Porsche and AMG models have long wait lists as well. Why? Here are some potential explanations, with why I don't like them.
  • It's standard cartel behavior, like OPEC restricting the supply of oil or de Beers restricting the supply of diamongs. The difference is that those vendors restrict the supply in order to drive up the price. Here, the vendors aren't driving up the price and instead people are having to queue up.
  • They're keeping the initial price low in order to create demand and buzz and then they plan to raise the price later. There are two problems with this explanation. The first is that the vendors haven't raised the prices. The second is that in some cases, such as the Audi RS6, the vehicles aren't even available anymore, even though there was clearly demand at the selling price.
  • The vendors are worried that customers will feel that they're being gouged if they raise the price, so they're concerned about their overall image. This seems like a sensible argument for an economy car like a Prius, but for an inherently super-expensive car like the RS6 or the M5, I figure that people expect to get gouged, so I don't expect that to turn people off.
So, none of these explanations is very satisfactory, but I don't have any better ones to offer.

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8 Comments

1) The car manufacturer restricts the behavior of their dealer(s) as an aspect of brand management.

2) Since auto manufacturing is slow and is managed from a long term PPF, the car manufacturer allocates slots in a limited delivery schedule to these dealers.

3) The dealers use the wait list to transfer risk associated with car delivery from themselves to the customer.

4) The car manufacturer allows it because the impact is positive for the brand -- it assures an orderly delivery of vehicles.

5) Customers unwilling to accept the wait list terms will still think of the car at the manufacturer's desired price point. So the manufacturer will not need to spend money to re-educate the consumer about the cost of the car.


With all of the car models in your examples, the root problem is the cost of manufacturing. Each of the examples you listed shares a manufacturing problem -- the manufacturer must make a risky investment in technology and make it work at projected costs for a manufacturing run. If they create too much demand and they can't hit it, then they lose a lot of money and get negative brand publicity. If they create too little demand then they overinvest in capacity.

I have seen lots of popular cars that are marked up when there's high demand. In the Seattle market at least, you'd see stickers with "adjusted market charge" or something similar, which was often several thousand dollars. Friends inthe Ferrari market also indicated that those dealers were not averse at all to charging more for popular cars. (In addition to charging $4k-$30k for spots on a waiting list)

It also depends on the brand management. Corporate HQ can really come down on dealers who price gouge on popular items, because it does hurt the brand.

EG, the Mustang GT convertible is hot RIGHT NOW. But how many people who got soaked by the dealer rather than an orderly waitlist are going to think twice before getting another Ford?

I'm having a lot of trouble accepting that people who buy Porsches or AMGs are going to feel gouged by having the price go up. Isn't most of the point of a Porsche that you paid way to much money for it?

OTOH, one of Mercedes strengths is the dealers aren't the slime-sucking-scum-of-the-earth you find in say, a Toyota or Ford showroom. (Although, to its credit, Toyota is trying to clean up its dealer network. That actually is part of the point of Scion: you can't behave like a scummy dealer and keep your Scion franchise. It also seems to be mostly working out with the Prius).

And one of the ways to maintain the "non scummy" dealer feel is to do allocation of scarce cars on a waiting list, rather than a "who's willing to bend over and take it more" basis.

Eric: If microeconomists are right about anything then *some* Porsche and AMG buyers must be lost when the price of their desired car is raised beyond a trivial amount.

Terence: The Ferrari dealer in Seattle ran into problems by overestimating the willingness of its car buying population to accept crappy service and irrational pricing. It was bought by one of the people the dealer was ripping off and it came under new management which was more customer focused. I've only seen the "adjusted market charges" at one place -- Park Place -- and that isn't really a dealership, it's really a consignment shop.

"Eric: If microeconomists are right about anything then *some* Porsche and AMG buyers must be lost when the price of their desired car is raised beyond a trivial amount."

Not if they're already selling every car they manufacture, which is quite common for super-lux cars.

But say that they lose customers, so what? The point is to make the maximum amount of money, not sell the most units. The fact that people are willing to wait seems to clearly indicate that they would be willing to pay fractionally more.

It seems like the core ingredient that no one in this discussion knows is the demand elasticity in the car market. I would lean towards super-lux cars having substitutes (older model years, other car models, etc.) while you seem to guess that they have fewer substitutes for their buyers.

I also think you may be overestimating the cost of the wait list. Especially because the wait list slots are almost always saleable. Buying the car is a different deal -- it commits you to pay for the product. And a lot of the buyers are financially savy and not interested in paying more than the resale market will bear.

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