Vehicle inventory scarcity and dealer markups

What are the dealer’s rights when faced with pressure from factories to curb markups?

Published on


COVID-19 and the chip supply shortage has made new vehicle inventory scarce. This has resulted in fewer vehicles available for sale. And as the pandemic ends and people are getting back to their workplaces, demand continues to rise for new vehicles. A fundamental principle of economics is that price inflation results as supply dwindles and demand rises. Specifically, as retailers seek income equilibrium to meet normal operating expenses amid reduced sales volume, artificially created by a reduction in supply, their only choice is to increase the sales price of their remaining inventory.

Why do manufacturers care whether dealers sell their vehicles at a price higher than MSRP?

The power of an automobile manufacturer to control pricing is somewhat limited by state and federal law, including to an extent anti-trust law. Nonetheless, manufacturers may suggest a retail selling price, called the MSRP (Manufacturer Suggested Retail Price). This is the price at which automobile manufacturers would like dealers to sell their vehicles, it is the base price in their manufacturer-provided consumer sales advertising campaigns, and it is the price on which they base many of their projections for purposes of brand competition. More importantly, however, it is the price at which manufacturers feel each model can have optimized sales volume results. Most manufacturers rarely chastise dealers for setting higher prices than the MSRP unless a dealer consistently prices their inventory higher at the expense of meeting manufacturer sales volume metrics. This is because sales volume is generally more important to manufacturers than price, and price is merely a variable that can skew sales volume.

In this environment of reduced sales volume, and being sensitive to the effect of consumer price perception on sales volume in each market segment in which each brand and model competes, manufacturers seek to limit the amount of added price dealers charge on each model.

State dealer franchise protection laws limit what factories can do against a dealer increasing prices, particularly in the market conditions currently facing dealers. Nonetheless, state and federal law govern how vehicle price increases may be advertised and dealers should be aware of these restrictions, so as not to give manufacturers the ammunition they need to take more aggressive action against them.

How do I properly advertise a vehicle for sale at a price above the MSRP in compliance with law?

The cardinal rule of vehicle advertising is that dealers must sell vehicles at their advertised price. If a dealer wishes to sell a vehicle over the MSRP, it should not advertise the vehicle at MSRP and should instead advertise it at the price at which it intends to sell it. This is because, as mentioned above, the MSRP is merely the manufacturer’s suggested price. But a reasonable customer may reasonably conclude that a dealer’s price advertisement of the MSRP is the dealer’s asking price of the vehicle.

The MSRP is listed on the federal Monroney sticker which must remain attached to the vehicle on the lot. Federal law prohibits its removal before completion of the sale. In California, the use of supplemental price stickers for market adjustments (i.e., dealer mark-up) is permitted. These supplemental stickers are regulated by California Vehicle Code section 11713.1(q), which requires the following:

  1. The supplemental sticker must clearly and conspicuously disclose in the largest print appearing on the sticker, other than the print size used for the dealer’s name, that the supplemental sticker price is the dealer’s asking price, or words of similar import, and that it is not the manufacturer’s suggested retail price.
  2. The supplemental sticker must clearly and conspicuously disclose the manufacturer’s suggested retail price.
  3. The supplemental sticker must list each item that is not included in the manufacturer’s suggested retail price, and discloses the additional price of each item. If the supplemental sticker price is greater than the sum of the manufacturer’s suggested retail price and the price of the items added by the dealer, the supplemental sticker price shall set forth that difference and describe it as “added mark-up.”

Dealers using a supplemental sticker must remember, however, to also include the total adjusted price in any online or other price-advertising or marketing, with the appropriate disclaimers, to avoid liability for advertising violations.

How do I respond to pressure from the factory to sell my new vehicle inventory at the MSRP?

While the MSRP is important to the factory, when faced with heat from the factory for selling vehicles over the MSRP, the fact that it is merely a “suggested” retail selling price is a good foundation for a response. In fact, the FTC has addressed this issue in in the antitrust context, stating that notwithstanding an MSRP being set by the manufacturer, a dealer is free to charge a higher or lower price for its inventory so long as it comes to that decision on its own. But establishing that the dealer has complied with state and federal law in advertising and selling its vehicles is an unassailable response to factory pressure.

Is there any reason I don’t want to add dealer markup to the price of my new vehicle inventory?

One final note, there are practical considerations in deciding whether and how much to increase the selling price of inventory. For example, when conditions get back to normal, will the dealer have damaged its reputation in the community? Will buyers have remorse, and resulting general dissatisfaction with the dealer, if they pay a mark up and then see similar vehicles priced regularly elsewhere? These are questions that only a dealer can answer based on their local market.