Would You Buy an EV from Amazon?
Online vehicle sales could reduce double marginalization.
Amazon’s new Hyundai Evolve Showroom feels almost like the future of car buying. You pick out the car you want, choose its features, and see it from all angles. The only thing you can’t do, currently, is to complete the sale. Instead, Amazon then connects you with a local dealer for final pricing and delivery.
The reason, of course, is the set of laws that protect U.S. car dealers, and prevent automakers from selling vehicles directly to consumers. Getting rid of these decades-old laws has been called, “The Simplest Way to Sell More Electric Cars in America”, because it could reduce the markups charged by dealers and reduce other incentive conflicts between automakers and dealers.
For today’s blog post, I want to imagine what would happen if these legal barriers could be overcome. I focus mostly on markups and so-called double marginalization, but I also briefly discuss other incentive conflicts between automakers and dealers, for example, about whether dealers have the knowledge and preparation to be effective advocates for EVs.
Double Trouble
A ubiquitous problem in supply chains is what economists call “double marginalization”. This arises when more than one firm along a supply chain charges a markup, resulting in an overall markup that is higher than what would be optimal for an integrated firm.
The relationship between automakers and dealers is a classic example. Both wish the other party would charge lower markups, but have little recourse except to complain. The automaker Hyundai, for example, recently wrote a letter to its dealers, “We are writing now because with great regularity our customers around the country are voicing displeasure with certain pricing practices which, if left unchecked, will have a negative impact on the health of our brand.”
This is Hyundai’s way of asking dealers to lower their markups. At the time, Hyundai dealers were putting markups as high as $19,000 on popular EV models. High dealer markups reduce how many Hyundai EVs are sold, making the automaker worse off. For their part, dealers feel the exact same way about high markups from the automakers. Double marginalization makes everyone worse off – automakers, dealers, and, especially, consumers.
Trading One Markup for Another?
But would selling cars through Amazon be any better? Dealers will argue that a move to online sales could actually increase markups. I’m not convinced.
First, online sales would not need to be limited to Amazon. I don’t know what other platforms would emerge (Walmart.com? Temu?), but the barriers to entry are modest and you could imagine half a dozen other companies selling new vehicles online. The more competitive this “retail” part of the business becomes, the lower the markups we would expect.
Second, you could see alternative contracts developing between automakers and online retailers. Rather than charge a separate markup on each vehicle, Amazon could receive a fixed annual fee, but leave all pricing decisions up to the automaker. This would generate profit for the online retailer, but without creating double marginalization.
Third, the automaker could go it alone with its own online presence. If the service provided by the online retailers proved too low quality, or the fees too onerous, the automakers could do it themselves with Hyundai.com, Ford.com, and Toyota.com. This is what Tesla has been doing for years, preferring to operate its own “showrooms” which are able to operate in many states because vehicles are then purchased online.
Other Issues
There are other incentive conflicts, as well, that could be addressed with online sales. While reducing double marginalization would benefit both EVs and gasoline-powered vehicles, addressing these other conflicts would, I think, tend to benefit EVs.
For example, there is a real question about whether U.S. dealers have the knowledge and preparation to sell EVs. There has been widespread reporting about dealers steering buyers toward gasoline-powered vehicles. I’m sure there are notable exceptions. With 20,000+ U.S. auto dealers, there are undoubtedly many examples of highly-informed, highly-prepared salespeople providing exceptional support for EV purchasers.
But, at the end of the day, these dealers have sold gasoline-powered vehicles for decades and change is hard. As recently as the end of 2022, two-thirds of U.S. dealers did not have a single EV available for sale, and 45% said they wouldn’t offer an EV even if they could. This ambivalence toward EVs is an obstacle to electrification goals like Biden’s goal that two-thirds of new vehicles would be EVs by 2032.
This lack of investment by dealers is an incentive problem. When a dealer fails to invest in the automaker’s new EV program, this makes the automaker worse off. But as an independent firm, the dealer doesn’t internalize this cost borne by the automaker. In the end, there is too little investment in EVs and other new technologies relative to what would be optimal from the perspective of an integrated firm.
On the other hand, a move to online sales would also require new approaches to delivery and service. I suspect the dealers will argue that these challenges are insurmountable, but my guess is that they are not. Tesla has been thriving with the direct sales model for more than a decade, and you can either pick up your vehicle at a delivery center or it will be delivered to you. Service is trickier, though there is a large network of existing independent repair shops that can fix tires and brakes and all the usual stuff.
Clear Gains from Reform
In the end, my views are closely aligned with those of other economists who have looked at this market.
“In our view, the current regulations tend too much toward protecting auto dealers from market forces and raising their profits; we argue that consumers would benefit if manufacturers could have much more leeway in experimenting with alternative distribution models than the web of franchise laws currently in place allow them to do.”
– Francine Lafontaine and Fiona Scott Morton, Journal of Economic Perspectives, 2010
EV buyers, in particular, would stand to benefit significantly from a move toward online sales. The alternative distribution model has arrived – we just need the political will to push back on the dealers. It won’t be easy. Dealers exert immense political influence, and have fought against change for a long time. But the gains from reform have never been clearer.
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Suggested citation: Davis, Lucas. “Would You Buy an EV from Amazon?” Energy Institute Blog, March 18, 2024, https://energyathaas.wordpress.com/2024/03/18/would-you-buy-an-ev-from-amazon/
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Lucas Davis View All
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley. He is a Faculty Affiliate at the Energy Institute at Haas, a coeditor at the American Economic Journal: Economic Policy, and a Research Associate at the National Bureau of Economic Research. He received a BA from Amherst College and a PhD in Economics from the University of Wisconsin. His research focuses on energy and environmental markets, and in particular, on electricity and natural gas regulation, pricing in competitive and non-competitive markets, and the economic and business impacts of environmental policy.
Energy Institute Blog 
Lucas asserts that “there is a real question about whether U.S. dealers have the knowledge and preparation to sell EVs.” That is perhaps true in some, and maybe most, states; but that’s certainly not the case in California. I served on Gov. Brown’s ZEV Task Force in 2012, and his administration hosted a big symposium on all things EV in the fall that year. Yes, finding car dealer representatives to embrace the emerging EV market at that symposium wasn’t easy (we did nevertheless). The biggest problem, according to dealer reps, was tepid public interest in EVs outside of upper-income enclaves.
Prices have come down since then, car choices have increased, and EV buyer demographics have expanded. But the lack of charging options and corresponding range anxiety are still big issues on the consumer side. As for the dealers, there still is a vestige of the concern they voiced in 2012: “We’re not sure that if you build it — and we seek to sell it — they will come.” At least in sufficient numbers to be profitable compared to the sale of lower-priced ICE vehicles.
While I agree with Lucas that double marginalization is a cause for concern, and the Hyundai letter is a cautionary example, I’m worried that having EV sales handled mainly through online platforms would create negative macro-economic problems by further thinning many jobs in the auto industry. We already know that the ranks of mechanics will be reduced substantially, and online sales could potentially eliminate tens of thousands (or more) of additional jobs. That may be ok in terms of achieving the most “efficient” EV market. But count me among those who don’t beleive that displaced auto-industry employees will just move elsewhere — with the same pay and benefits — in the job chain, enhance productivity, and everything will be hunky dory. It won’t.
I don’t even want to consider it. Amazon is becoming the go-to company from cradle to grave. Is that what we want?
Hyundai dealers are selling Ev’s at thousands of dollars lost per car
unfortunately you seem not to understand that Tesla sells everything at list and until recently had a built in double margin
do you know anything?
My folks took delivery of a Porsche 944 Turbo in Germany back in the 80’s. They saved some bucks on the vehicle destination charge and they got to drive it around Europe for a few weeks before it took a boat across the atlantic. I think they paid a bit more, but not much more, than a US dealers cost for the car. When visiting Japan back in mid 90’s I recall that direct purchasing of new vehicles from the manufacturers was possible. It seems that sales model has advanced over the decades-
The ‘Complete’ online sales of new cars start in Japan. Will this new way of buying cars take root? | FURUNO ITS Journal | FURUNO
We haven’t purchased a new car in decades as R&R’ing our paid off modes of transportation, 20 years ago we purchased- via E-bay- our 02 Chevrolet Silverado dually diesel truck, has been less expensive/costly then paying the sales tax if we bought something new.
Thanks for the “Repair Driven News” link!
“With inflation still elevated in the U.S. economy, automotive care and service costs have increased by 45% on average per service visit since 2021, according to Cox Automotive.” Hit home for us earlier this month!
We got to experience how parts mark up’s can be a tad excessive in an emergency repair. I bought a quart of Mobil 1 at a local Napa store for $7.19. An emergency oil change, to address a repair shop overfilling the LS 430’s engine by a quart and half, led to us paying $17.89 per quart for 4 quarts of Mobil 1! Boo- we will never be back to either independent repair shop again.
Mark Miller
EV’s are expensive to buy, to insure and to repair.
Middle/low income households don’t care where and why rich people buy these expensive gadgets/cars ?
Only thing they care is $25 oil change for their 150k miles toyota/honda.
There is no way I’d buy a used EV online. The significant thing in any EV is the battery; how much life is left?
New would have a guarantee. But even still, one would have to drive the car. I’m 188cm tall. I just don’t fit in some cars. How does the car handle? Do I feel safe in it? Is the acceleration too much or too little? These are all subjective and individual. This is where the show room comes in.
Then there’s the part of maintenance. EV’s need a lot less maintenance, but it is still needed.
Who is responsible for warrantee/guarantee issue and where does one go to resolve them?
Personally, if I’m not buying from a reputable source, and those are few and far between, I consider an online purchase a gamble.
OSD
I would never buy anything from Elon Musk. That being said, a local Hyundai deal was happy to lease me an Ioniq 5. As for service, there are four Hyundai dealerships within a 30 minute drive of my home in northern San Diego County, all with full service departments ready to perform scheduled maintenance (rotate tires, update software). Where do you take a Tesla?
I have owned a Tesla Model 3 for five years and the experience suggests that EVs are basically inconsistent with the separate dealer model. As I understand it, the dealer model provides much of its profit through servicing vehicles. In the five years that I’ve owned my Tesla and put on about 45,000 miles (thanks to Covid isolation) service needs have consisted of fixing a windshield washer hose connection that wasn’t working properly, replacing tires (at 42,000 miles) and replacing the 12 volt lead acid battery. The latter, which was done in my driveway by a Tesla service person, cost a whopping $124.
Focusing on selling EVs rather than ICE-mobiles would eliminate most service needs and eliminate substantial portions of dealer profits.
Another reason auto dealers prefer to sell internal combustion vehicles is that they require more service, which continues to make more money for the dealers for years after the sale.
EVs require less maintenance, but can be more expensive than gasoline-powered vehicles for major repairs. https://www.wsj.com/business/autos/ev-repair-expensive-eecf09fd
It’s well understood car dealers make most of their profits from service, not from sales. That’s why they sell cars at a small mark up over direct dealer costs. The EV unwinds this relationship (even if major repairs might be more expensive.)
Gasoline cars became obsolete a couple of decades ago. Resisting the EV rise is the equivalent of insisting people will return to horse and buggy when this car silliness passes.