The economics of auto dealers

Had my second car buying experience yesterday. The economics of buying a big ticket item is quite strange because of the small margins and customization options on cars. A 5% increase in price for the customer may translate to a doubling of profit for the dealer. So there is a natural incentive for the dealer to push high margin options to the customer. This makes the whole process of buying a car painful for the alert customer, having to say not a million times. Worse, for the for the unaware customer, there is plenty of ripoff. Given the tenacity of dealers in selling LoJack, Teflon Coat and other crap, it is quite likely they do catch a good share of unsespecting users.

Now the question is this. Honda is making a good product, and from what I know they have respectable business practices. They want to sell me a car. Why do they have these shady characters coming between me and them? Part of the answer is that under the current model, there is no incentive for any one company to clamp down on dealers. There will always be unsuspecting buyers, who can be parted with more of their money. Any car company that does not take the "stupid money" will end up with lower profits for its dealers, and in the end raising the price for the smart money.

But this trend is reversing, and I see great potential for sites like CardDirect.