If the thought of buying a new car at a dealership fills you with dread, you’re far from alone. A survey conducted by Harris Poll revealed that 61% of Americans “feel like they’re taken advantage of at least some of the time when shopping at a car dealership.”
Further reinforcing this sentiment, a survey found that 60% of customers identified negotiating with salespeople and dealing with post-purchase paperwork as the most disliked parts of the car-buying process.
Interestingly, an Accenture survey showed that three-quarters of customers expressed willingness to consider completing the entire car-buying process online if given the chance.
This would include everything from financing and price negotiation to back-office paperwork and home delivery.
Dealership markups have further fueled consumer frustration, especially in the aftermath of post-COVID supply chain disruptions. A 2022 study revealed that 80% of buyers ended up paying above MSRP, a trend that has caused concern for manufacturers like Ford and Hyundai, who worry about the potential damage to their brands.
However, manufacturers have little control over these markups, as dealerships operate as independent businesses.
One significant issue is the lack of genuine market competition among dealerships in the U.S., which puts them in a position to engage in rent-seeking behavior.
Also Read: The Ethics of Selling Unsafe Cars in Emerging Markets
For example, all 50 states have enacted laws that either prevent or severely restrict car manufacturers from selling vehicles directly to consumers.
A report cited in an economic analysis paper by the Justice Department’s Antitrust Division noted that a build-to-order system could save consumers $2,225 per vehicle, based on an average car price of $26,000 in 2000.
Some states have gone even further, banning direct sales of used cars and even simple accessories by manufacturers. The Federal Trade Commission has advocated for the repeal of such protectionist measures.
Another legal constraint comes from “Relevant Market Areas” (RMAs). These laws give dealerships or groups of dealers exclusive territorial rights by prohibiting manufacturers from establishing additional dealerships in specific regions.
This effectively shields dealers from competition. Furthermore, dealer termination restrictions often include exceptions for “good cause” like fraud but exclude the manufacturer’s desire to streamline its dealer network for efficiency.
These laws have their roots in the mid-to-late 20th century when franchise protection laws, such as the Automobile Dealer Act of 1956, were introduced.
These measures aimed to address the significant bargaining power manufacturers held over dealers.
At the time, manufacturers could demand advantageous agreements due to their superior leverage, leaving independent dealerships vulnerable to pressures like inflated car quotas, which burdened them with surplus inventory.
While these laws may have been more justifiable in the past, today they largely serve to protect dealership monopolies.
As Greg Rosalsky noted for NPR’s Planet Money, “the industry is seeing growing consolidation, with multibillion-dollar corporations now owning hundreds of dealerships across the nation.”
With their increased power, auto dealerships have become influential political players. In 2023, the National Auto Dealers Association (NADA), representing dealerships and auto franchises, spent over $6 million lobbying the federal government alone.
State-level lobbying efforts have also led to legislative victories, including new protectionist laws in California and Florida.
Proponents of the franchising system argue that protecting dealers also benefits consumers. They claim franchises are incentivized to provide valuable services, such as handling recalls and performing repairs.
Since manufacturers pay dealerships for repair work, it’s argued that dealers may act more in the customer’s interest compared to workers employed directly by manufacturers, who might prioritize cost-cutting over service.
However, this reasoning is contentious. There’s no inherent reason why a system cannot eliminate protectionist inefficiencies while retaining the beneficial services dealers provide.
Also Read: Top Mistakes to Avoid When Selling Your Car in 2025
Economists Jerry Ellig and Jesse Martinez, writing for the Mercatus Center, highlighted that companies have plenty of reasons to voluntarily adopt franchising, exclusive territories, and dealer protections.
These practices can enhance efficiency and quality for consumers while lowering costs.
A free market is far better equipped to determine the optimal structure for dealerships, inventory management, and car sales, especially in the digital age, where businesses can respond more dynamically to consumer demand.
Challenging protectionist franchising laws remains an uphill battle, as legislators from both major parties often support and uphold them.
Companies like Tesla, Rivian, and Lucid have managed to secure legal exceptions for EV-only sales, but gas-powered vehicles still dominate over 80% of the market.
