Wednesday, February 06, 2013

Shut Up and Deal

Interesting example of transactions costs economics, and the "hold up" problem.  It is a generic problem, but auto dealers are a particularly important bargaining setting, because the stakes are high and both sides have power. 

The recent scoop:

If a manufacturer expects substantial regional sales growth, it can survey its local dealerships and then dictate that they expand their operations—showroom, service facilities, lots, everything—to meet the projected volume. The dealer might be less optimistic and reluctant to fork over the millions required to inflate his business by 50 or 100 percent. If, however, he is unco­operative, the factory might add another franchise nearby that will cut into his existing sales. If state laws prohibit that, the manufacturer can cut a portion of the dealer’s margins, relying on a clause in the franchise agreement that specifies the size of the dealership required by each market area. “Market area” being a somewhat nebulous concept, there is much room for disagreement. Additionally, factories have been known to get twitchy when their dealers own another store peddling a brand deemed undesirable or overly competitive, even if the second franchise is housed in a different building. It’s technically illegal for a manufacturer to do so, but adding a brand that the carmaker doesn’t like might trigger a clause in the franchise agreement that cuts a dealer’s margins. One dealer told us that the clause cost him $25,000 to $40,000 a month—enough to motivate him to sell the offending store.


Nod to WH

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