Understanding Why Dealers Charge More than MSRP

In the world of car sales, it's not uncommon for dealers to charge more than the Manufacturer Suggested Retail Price (MSRP). This practice can be perplexing, especially for consumers who are unaware of the underlying economic principles at play. In this article, we'll explore the reasons behind this phenomenon and discuss how market demand and supply dynamics contribute to the pricing structure in the automotive industry.

Supply and Demand Dynamics

The fundamental economic principle of supply and demand is at the heart of why dealers might charge more than MSRP. When a particular car model becomes scarce or highly desired, the imbalance in supply and demand can lead to higher prices.

For instance, if a dealer can secure only a limited number of a certain model due to factories or suppliers struggling to meet the demand, they might be inclined to charge a premium price. Conversely, if there is an oversupply of a model in the market, dealers are likely to offer discounts to attract customers.

Consumer Behavior and Price Sensitivity

Another factor that influences dealers' pricing strategies is the willingness of consumers to pay more for a brand new car. Often, buyers with excess money (regardless of whether it’s good sense) are willing to pay inflated prices for the latest and greatest model.

As highlighted in the example, sometimes dealers will apply a 'Market Adjustment' fee, in addition to the MSRP, to reflect the extra demand for certain models.

Personal Experience and Market Differentials

One personal experience from 2007 illustrates how market differentials can impact pricing. In search of a Toyota Avalon, the author found that the closest dealership added a significant 'Market Adjustment' fee, significantly increasing the total cost. However, a visit to a different dealership a week later showed that the same vehicle could be ordered for less than MSRP.

This anecdote underscores the variability in pricing and the importance of shopping around. Dealers often operate in a competitive market, and consumer behavior plays a crucial role in determining prices.

Market Trends and Pricing Flexibility

Market trends also affect pricing. Currently, cars and trucks are experiencing above-market demand, which has allowed dealers to charge more than their suggested retail price. This phenomenon is driven by several factors, including economic conditions, new model releases, and overall consumer preferences.

For example, when a new and highly anticipated model is released, it can create a surge in demand, leading to dealers charging more to meet that demand. However, this trend may not last indefinitely. As time passes and supplies are replenished, the price pressures may ease, allowing dealers to sell vehicles at or below MSRP.

Conclusion

In conclusion, dealers charge more than MSRP because of supply and demand dynamics, consumer behavior, and market trends. While it can be frustrating to pay more than the suggested retail price, understanding these factors can help consumers make more informed purchasing decisions and potentially save money by shopping around in different markets.

Remember, the price of a car is not set in stone. It is influenced by a wide range of economic and market conditions. By staying informed and shopping around, you can often find the best deal for your new car.