The California CARS Act would save consumers $234 million annually in reduced search costs and 8.5 million hours in time savings

The California legislature is considering a law that would increase consumer protections in the new and used vehicle markets. The first part of the law would ban bait-and-switch tactics and junk fees by car dealers. It is modeled on a Federal Trade Commission rule, which was struck down by the Fifth Circuit Court of Appeals on procedural grounds earlier this year. The second part includes a first-in-the-nation 3-day cooling-off period for used car buyers, which is not analyzed here.

We are economists at leading U.S. research universities who study competition in consumer markets.¹ We co-authored an amicus brief in support of the FTC rule that laid out the economic case for the rule and calculated the savings to consumers from preserving it. The brief was favorably cited in oral arguments by the court. To help inform debate on the California law, we have updated those calculations for the size of the California market and inflation. We estimate the CARS Act will yield aggregate search cost savings of $234 million per year if it results in just 20 percent of consumers visiting one fewer dealer during their shopping process. Updating the analysis from the FTC rule, we also calculate an aggregate of 8.5 million hours in annual time savings from the law.

Economic Evaluation

The motor vehicle market is characterized by opaque and deceptive pricing, with car dealers routinely raising the price above the advertised amount once the consumer has arrived at the dealership. In our amicus brief, we argued that the federal rule would benefit consumers and the overall market in two ways. First, by requiring dealers to honor advertised prices, the law would reduce search costs, as consumers would not need to individually visit each dealer to discover their actual price. Second, the law would reduce the deadweight loss² from dealers raising the price above cost once the consumer was on the premises.

In our amicus brief, we calculate the savings from reducing search costs based on the estimates from Murry and Zhou (2020). To estimate the savings for the California market, we updated these calculations using counts of new and used car sales from CNCDA and for inflation using the CPI-U. We estimate that if the law resulted in 20 percent of consumers visiting one fewer dealer during their shopping process, it would yield aggregate search costs savings of $234 million per year. Estimates for other reductions in dealership visits are shown in the table below.

The FTC rule calculated the accompanying time savings to consumers from reduced search costs. Updating those numbers based on the number of new and used car sales in California yields aggregate time savings of 8.5 million hours per year.

In the amicus brief, we argued that these numbers were likely an underestimate of the total savings to consumers, since they only accounted for the reduction in search costs, and not for the effects of greater price transparency. While we didn’t calculate a precise number for these additional savings, we referenced studies that estimated the combined effects of greater price transparency and reduced search costs at significantly more than the numbers above.

Markets work best when consumers can easily search across the options available and when businesses advertise their full prices in a transparent manner. The California CARS Act is grounded in these fundamental economic principles and would generate substantial savings for consumers and improve economic efficiency.

1. Neale Mahoney is a Professor of Economics at Stanford University, Tobias Salz is an Associate Professor of Economics at MIT, Babur De los Santos is an Associate Professor of Economics at Clemson University, Matthijs Wildenbeest is a Professor of Economics at the University of Arizona, and Charles Murry is an Associate Professor of Economics at the University of Michigan.

2. Deadweight loss is the forgone value of sales that did not occur. In this case, the deadweight loss occurs when dealers mark up the price above consumers’ willingness-to-pay, preventing the transaction from occurring.