Post-pandemic era made demand for cars grow faster than the industry can supply. Such event has led to outraging dealer markups, but there is a light at the end of the tunnel
I am sure you have seen that term everywhere on the Internet. Not recently, but for the past few months. In short, dealer markups happen when dealerships set a price tag which is way above the price which the car’s manufacturer suggested at first (the MSRP). At first, it looks like dealers are just being greedy, huh?
The truth is that dealer markups are a nasty fruit of globalization. Since the automotive industry is densely connected throughout the world, any major event which occurs in one region will eventually affect others. In this article, we are going to briefly explain what has triggered those markups and how to avoid them.
Markup on cars is Economics 101
This problem was triggered by the 2020 pandemic. Automakers, like many other companies, saw demand plummet and had to adapt by reducing supply. That meant closing plants, halting investment plans, and producing less. Such operations present ramifications of all kinds, so they take a long time to happen.
As soon as things started to calm down, consumers ramped up their demand. The industry would love to cater to it but, again, that takes time. We have entered a shortage of semiconductors, which are parts that pretty much all cars use nowadays. Their current production is simply not keeping up with that demand.
As if that was not enough, there is the Ukraine invasion. Everyone is severing commercial ties with Russia, but that means losing an important supplier of commodities and buyer of cars. It has been difficult to buy gas-powered cars because gas prices are high, and electric cars because there are no semiconductors.
Seller’s market
Carmakers have to keep investing in technology and releasing exciting vehicles because it is the only way to stay active. However, some of those vehicles are so nice that they attract a lot of demand – again, more than the company can produce. Sadly, that creates yet another opportunity for price gouging to appear.
Some dealers call it “Market Adjustment”, while others use more direct variations of “dealer markup”. The truth is that they inflate prices just because they can. They know that there will always be someone to buy at those prices. In fact, markups change quickly – the price you saw today may be different tomorrow.
Since that practice has not been firmly regulated yet, dealers are going crazy. In some regions, car prices increase every few days. New models are released with a given price applicable to only a few initial units. In the USA, people have founded the Markups.org website to track dealer markups all across the country.
Used cars selling over MSRP
Since new cars have been affected for so long, it is only natural that price gouging migrates to used ones as well. The rationale is that, if you do not want to pay that much or wait that long for a new car, the used market has something close to offer. And any dealer markups there will still be lower than new-car ones.
Did you think that is the end of it? Not at all. Since new and used car dealerships are actually making a lot of money from that practice, individual owners have decided to join the party. It is commonly referred to as “flipping”: they buy a car model specifically to resell it as soon as possible – for a profit, of course.
In such a practice, owners flip cars whose demand is naturally huge. That is the case with limited editions, sports cars, all-new models, or performance versions of regular cars. They always resell their cars through auctions hoping to get enough money to cover their initial payment plus paperwork and make a profit.
Greed is not always good
If you find dealer markups outraging, you are definitely not alone. Recent studies reveal that this practice is making people unwilling to use the same dealership in the future or recommend it to others. After all, we are talking about a cheap trick to make easy money. We could not expect anything different from it.
Customers know that those dealers are trying to take advantage of them. Price gouging may bring profits quickly, but this situation will not last forever. Even if the underlying problems persist, the tendency is that customers will gradually switch to any dealer that offers more reasonable prices. It is as simple as that.
In terms of overpriced auctions, we can already see karma doing its job. In short, some people have been buying markup cars on purpose, hoping that the auction will bring their profit. As it turns out, people are choosing to wait for things to calm down. Many of those overpriced cars are ending up sold at a loss.
How to avoid dealer markups?
Sadly, we are in this situation for the long run. The industry is continuously working to take its production volumes back to normal, of course. However, any issue with its suppliers, logistics, or staff will slow down the whole process. The bright side is that there are some actions we can take to avoid that price gouging.
The first action is to have patience. That situation is harmful to automakers as well because it affects their prestige in the long term. Rest assured that they are doing whatever they can to solve that issue. As their production ramps up, supply will match demand and the market will work with realistic prices again.
Another important action is to browse other places. As we mentioned, there are dealerships that do not charge over MSRP. Customer demand is a powerful tool when it is collective, so it is also interesting to share that train of thought with potential buyers you know. Now, let us present some other resources.
Browse other options
Generalist cars present several options in terms of color, trim level, powertrain, and body style. In general, dealer markups only affect a few combinations. If you are trying to get an honest price, it is interesting to browse all of them. Chances are there is a less hyped one which offers pretty much everything you want.
Consider factory orders
Even though most manufacturers require you to buy a car through a franchised dealership, you can order it from the factory the way you want. And there will be minimal price gouging. The drawback is that those orders may take months to arrive. It is a matter of analyzing whether you can spend time without a car.
Dealer markups on the fine print
It may seem obvious, but it is always worth remembering. If you are buying, make the effort to read the itemized list of charges. If you are leasing, make the effort to read the contract. There are times when the dealer markup on new cars is disguised with fancy names, or in the shape of unclear additional charges.
Even though the market is filled with cars selling over MSRP, it is still possible to avoid dealer markups in 2023. With this article, I hope you can understand what has triggered such an unpleasant situation, what to expect for the near future and, more importantly, how to keep pursuing your interests as a consumer.
Sources
- Brand and dealership loyalty decreasing as consumers pay more, GfK research says – Automotive News
- Chip Shortages And Dealership Markups, Is There An End In Sight? – TopSpeed
- Flipper Fails Spectacularly Trying to Sell 2023 Honda Civic Type R on Cars & Bids – Jalopnik
- How to Avoid Dealer Markups in 2023: Buyer Beware – Kelley Blue Book
- Now There’s a Crowdsourced Website That Tracks Car-Dealer Markups – Car and Driver
- Owner Auctions 2023 Toyota GR Corolla, Reportedly Loses Thousands of Dollars – Jalopnik
Danillo Almeida has explored his passion for cars in two distinct ways. The first one is his graduation course in Mechanical Engineering, which will hopefully lead to a job position in the field. The other one is expressing his knowledge and opinions on the matter through writing. Almeida has already contributed to blogs, stores, and websites in general writing automotive content in many formats.
