Tight Supply and Demand Means More Expensive Cars

Detroit’s automakers are working to bring vehicle supply and demand into harmony by reining in their reliance on incentives and discounts to sell cars. This has raised vehicle prices during the recession, a move that seems counterintuitive. The Big Three’s vehicles sold for an average of $2,000 more in the second quarter of this year than in the first quarter, according to J.D. Power and Associates.

Ford and GM are leading the drive to cut incentives after learning the hard way that a bloated inventory and huge rebates aren’t the best way to make a profit. Rebates can help improve market share, but they cost automakers money. The Cash for Clunkers program teamed with a summer production shutdown created low inventory levels that haven’t been seen in years.

This is a lesson that the Big Three’s competitors have already perfected. Toyota offered an average discount of $1,584 per vehicle this year, while Honda offered $1,567, according to Autodata. Meanwhile, Ford offered $2,811 discount per vehicle; GM, $3,418; and Chrysler, $4,407.

Detroit’s automakers are attempting to match vehicle supply to demand more closely and decrease their reliance on incentives. This has cost consumers $900 million in net pricing in North America during the second quarter. The average price of a Detroit automaker’s car rose 7.8% from $25,567 a year earlier to $27,571 in the second quarter of this year, according to J.D. Power.

Unfortunately, what is healthy for automakers will cost consumers.

Buying a Car Gets Pricier as GM, Ford Cut Inventory (Bloomberg News)