Selling cars

FOR customers about to splash out hundreds, or even thousands, of dollars on something like a new television or car, it makes sense to try out the goods and ask some questions before parting with their money. So it is also sensible for them to visit the dealership with the fullest range and the best customer service. But ample showrooms and well-trained staff are costly. And consumers may find that, having made their choice, they can save money by buying from dealers who skimp on such expenses—or, in the case of internet-only sellers, who spend nothing on maintaining physical outlets.

Rival dealers also like to see others invest in high-quality stores. In one of the cheekiest examples of low-cost sellers free-riding on other retailers’ lavish spending, Dixons, an online electronics retailer in Britain, ran a big advertising campaign in 2009 urging the public to try out televisions and other gadgets in big department stores—and then go to its website and buy them more cheaply (ironically, the parent company of Dixons operates physical stores vulnerable to online free-riders).

Unsurprisingly, high-quality retailers have trouble recouping their costs—a phenomenon economists call a “missing market”. That is a good thing for consumers: free-riding dealers keep prices down. But they also cause problems. The pressure on prices forces full-service dealers to cut spending on showrooms and advertising. As a result, fewer consumers may get to know the products, and overall demand for them may fall.

Carmakers have tried to overcome free-riding by guaranteeing each dealer an exclusive territory by banning other dealers from opening outlets there. But this causes problems of its own. A local monopoly reduces a dealer’s incentive to keep prices low. That, in turn, risks reducing demand and hurting the manufacturer. So carmakers have also sought to impose price ceilings as well as strict quality standards on dealers’ showrooms. Such market-distorting rules have attracted the attentions of antitrust regulators from time to time.

The rise of internet car-sellers has acerbated the free-rider problem. In the past ten years the proportion of car-buyers relying on the internet to research which model to buy has risen from 19% to 94%, according to a recent study of car-buyers worldwide by Capgemini, a management consultancy. Even in developing countries such as India and China, the study finds, online window-shopping is now the usual way people look for a new car. And 42% of buyers worldwide say they expected to make their purchase online. Carmakers are also getting worried about price-comparison websites like TrueCar, which prompt dealers to offer ever-bigger discounts (see article in our print edition).

In America most car-buyers still visit a physical dealership to do a final test-drive and complete their purchase of a new car. Yet a dealer who tries to please the carmakers by maintaining palatial showrooms is forced to compete with shabbier outlets in neighbouring districts—which put their low prices up on internet price-comparison sites.

A paper by two American-based academics, published in 2001, just as the dotcom boom had turned to bust, suggested a market-friendly answer to all this. The manufacturers themselves could open “hybrid stores”, in which the full range of their products are beautifully displayed, but with not much stock. Consumers could try out the products, even if they ultimately bought them from a retailer elsewhere. The best-known adopter of this approach is Apple, a computer maker, whose chain of stores in city centres and shopping malls let browsers try out the company’s gadgets, with lots of bright young assistants offering advice, but with little pressure to buy.

Joe Oddo, one of the authors of the Capgemini report, notes that carmakers are increasingly following suit. Many have opened chains of Apple-like car showrooms in city centres, where potential buyers can kick tyres, sit behind the wheel and maybe even do a test-drive. Those who decide to buy are typically directed towards a retail dealership close to their home, which will also offer the after-sales services that motorists prefer to have close by. This is unlikely to reverse the trend towards fewer, larger dealerships (see chart). But neighbourhood dealers will no longer need to maintain such well-appointed and heavily staffed showrooms. The free-riding problem is unlikely to go away, but it will be less costly