AP Photo/David Zalubowski

Why It's (Mostly) Illegal to Buy a Car Directly From the Manufacturer


As you may know, federal law in the United States provides protections to car buyers in the form of car dealership regulations, such as the car dealership lemon laws, the used car rule, and car dealership contract law. However, sometimes, these protections become corrupted and end up harming the consumer much more than helping.

For instance, according to state laws and the Federal Trade Commission (FTC), it is illegal for a consumer to purchase a vehicle directly from a manufacturer. This regulation was written with the best intentions and, for some time, it worked properly. However, these days, it allows auto dealers to charge higher prices and negotiate worse deals for individuals purchasing either new cars or used vehicles.

How These Car Dealership Regulations Formed

When these regulations were formed, they solved a very real problem. Because auto manufacturers were the only outlet for purchasing vehicles and these manufacturers were combining into fewer and fewer massive corporations, they were able to raise prices however they saw fit and exert pressure on dealerships. In response, states passed laws protecting news and used car dealers from predatory manufacturer practices.

These protections took on different forms, including disbarring manufacturers from selling vehicles themselves, limiting encroachment by manufacturer connected dealerships, and other vehicle sales regulations.


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Unfortunately, these protections only exacerbated the issue of lacking competition. States allowed dealership franchises to hold entire areas that could not be encroached upon. Originally, this protected small-time dealerships and prevented manufacturers from exerting their power over these dealerships. However, as auto dealerships grew, they're market power became part of the problem, as well. Since there was no competition, these motor vehicle dealers were able to raise prices on their end to support their own profits.

This is how we ended up in the modern dealership climate (and we haven't even touched on stuff like the OFAC, dealer compliance, and other consumer protection stuff). Automobile dealers have much less competition in many states, which allows them to negotiate with car consumers to increase prices on vehicles since there are few other places to go. For instance, one study from 2015 showed that 30 miles of distance between similar dealerships increased prices by $500.


Of course, regulations and public policy are part of a healthy economy and a robust auto industry. The situation would likely be even worse if car manufacturers had been allowed to continue merging and monopolizing both production and distribution. However, it is essential that new regulations are thoughtful and work in terms of consumer needs rather than manufacturer or distributor needs.

This post was originally published on December 4, 2019.

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