State laws requiring automobile manufacturers to sell through franchised dealers add an estimated $3,934 to $4,992 to the price of a new vehicle, functioning as a “middleman tax” that raises costs and limits innovation, according to a new issue brief from the International Center for Law & Economics (ICLE).
The report updates a 2000 Goldman Sachs study and subsequent U.S. Department of Justice analysis. Authors Kristian Stout and Subiksha Ramakrishnan argue that Great Depression-era laws originally intended to protect small dealers have evolved into protectionist barriers that fragment the national market.
“The policy principle is simple: allow consumers to benefit from competition,” said Stout, ICLE’s director of innovation policy. “States should not mandate a single distribution architecture when multiple models can compete to serve consumers. Removing this tax would lower costs and expand choice.”
Key Findings:
- Per-vehicle surcharge: Direct-to-consumer sales could save buyers $3,934 to $4,992 per vehicle, based on a $50,000 average transaction price.
- Inventory inefficiency: Required dealer inventory adds $1,045 to $1,105 in carrying costs, worsened by floorplan interest rates of 6% to 9%.
- Supply-demand mismatch: The “make-to-stock” model creates about $1,600 in costs per unit, as manufacturers rely on incentives to move misallocated inventory.
- Overhead and commissions: Maintaining extensive physical retail networks and commission-based sales staff adds roughly $1,200 to $1,900 in avoidable costs.
- Market fragmentation: The laws force out-of-state manufacturers into rigid business structures, potentially implicating the Dormant Commerce Clause by burdening interstate commerce.
- Innovation barrier: The franchise model is structurally incompatible with software-defined vehicles that depend on over-the-air updates and integrated digital platforms.
“Protecting an incumbent distribution channel is not the same as protecting consumers,” the report concludes. “Allowing manufacturers to compete through different models would better align the law with the realities of the modern automobile market.”
“Protecting an incumbent distribution channel is not the same as protecting consumers,” the report concludes. “Allowing manufacturers to compete through different models would better align the law with the realities of the modern automobile market.”
