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naraburns  nihil supernum  1yr ago (text post)   4067 thread views

Small-Scale Question Sunday for January 29, 2023

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Why aren't car manufacturers raising their prices? Prices for used cars have doubled and there is a shortage of new cars because prices are too low, causing ridiculously long waiting periods. Dealerships are reportedly trying to raise prices but manufacturers don't want them to. Why do the manufacturers care and why don't they just raise prices themselves and increase their profits?

I think some of (all?) the big automakers do in-house financing. Maybe there's a fear that raising prices could end up with them holding the bag if things go to shit. Their financial arms could also lack the capacity to take on 20% or more 'debt' per vehicle.

It's also possible that, with higher interest rates, their financing segment is doing quite well. Maybe raising prices of the vehicles would disqualify many buyers (since I'd imagine the in-house financing at these places are a bit more selective), and ultimately lead to lower profits. I'd imagine the rich and poor alike aren't financing their purchase through the automaker. Their market is a certain type of middle-class buyer, and it's possible that they are price sensitive enough that if the sticker price goes up, they might go to their bank or a credit union looking for a better rate.

The automakers probably prefer to have customers finance through them, because it most certainly leads to customers buying their next vehicle through them. If you're financed through Ford, then it'll be easier to get a new vehicle (and trade in your old one) through them.

So automakers might be leaving a couple grand on the table, but higher interest rates have likely made up for that. And more importantly, they are thinking about their revenues in 5+ years, and the cost of a few grand to ensure a return customer is pretty cheap.

Existing price points, product features, industrial design, branding, marketing, etc. are the result of elaborate, long-running efforts by automakers to segment the market in a way that they believe works to their benefit.

Raising prices significantly would cause a misalignment between what the industry has taught different segments of the market to want, and what people within those segments could actually afford. Automakers have probably decided it's not worth risking their carefully cultivated segmentation just to bank some short-term profits.

They are effectively doing this by only keeping top trims & high margin cars in stock.

They don't just want to make short term profits, they want to permanently change buying behaviors.

If there is a shortage then prices are below the market clearing price. Why are they and why do manufacturers not want dealers to charge those market clearing prices?

Because the automobile industry is in the middle of an existential disruption from new electric car manufacturers. They would rather maintain their market position than make a few extra dollars in this process. The scariest proposition is someone buying another car.

3 low margin Camrys is better than 2 high margin Camrys + 1 Tesla/Rivian/etc. sold. They want to starve out the new players.

out the new players.

so it's an anti-competitive trust?

They are increasing https://money.com/car-prices-ownership-costs-record-highs/

The average price of a new car reached an all-time high of $48,182 in July, according to Kelley Blue Book. That’s a 11.9% increase over the same month last year, and it too is significantly higher than the most recent overall inflation rate.

Yes, I know that dealers are raising prices, but why are they facing resistance from manufacturers and why are they not raising them by enough to keep the backlog of orders clear? Why are the manufacturers not taking advantage of the shortage by raising prices until the shortage disappears?

An order in backlog is better than an order that switches to a substitute good, namely a used vehicle. Besides which, Dealer Agreements often are in the form of a promise to buy X units at Y prices over 24 months or whatever, so may limit steep hikes.

From an economic actor standpoint, if I expect price hikes to be temporary, I'm gonna postpone my transaction. If I expect a slow but steady rise in prices, I'm gonna move it forward.

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