The Ghost of Disparate Treatment Past
The Ghost of Disparate Treatment Past

Pricing products and services would appear to be neither science nor art. Although the bespectacled accounting profession can provide some indication as to what prices to charge so that a business doesn’t lose money it may not be so accurate when it comes to what to charge to maximize profits.

The three basic rules of pricing — what it costs to produce, what the competition charges are, and what the market will bear — appear to be logical, but if a business can charge an extremely large retail margin, and customers agree to pay that price, is this a matter which should be regulated? Of course not, unless you are Karl Marx or one of his adherents.

As Jackie Gleason once remarked, “No one is overpaid if someone is willing to pay it.” Fundamental contract law is not concerned with the exchange of value between the two contract traders unless it is a special circumstance such as a fiduciary relationship.

Secondly, does everyone pay the same price for the same item on a routine basis? And should everyone pay the same price for the same item? The answer to these two questions is obviously “No” — if it’s a free market. Merchants and customers can sell and buy items as they wish. Such a system should ultimately produce a fair exchange between the two parties.

Third, it is illegal to intentionally discriminate against what courts call “discrete and insular minorities” in commerce. Dealers who intentionally discriminate should be prosecuted. However, if there is no intention to discriminate but a particular minority, on a national basis, appears to routinely pay a higher price for particular products, should there be a cause of action? Or should the law be changed to protect against this result?

For example, if Hispanic consumers pay more than white consumers for GAP on a national basis at franchised dealerships, should Hispanics be able to file a class action, or should a new law be passed to protect them? These are broad policy issues, which would seem to be more rhetorical than otherwise.

The recently discredited disparate impact actions by the Consumer Financial Protection Bureau are illustrative on this point. Is there any accurate methodology which can ascertain this alleged disparity between Hispanics and white consumers? The proxy method has certainly been discredited. Could it be reasonably argued that Hispanics are disadvantaged due to educational, cultural, or language disparities which may produce this result, if the pricing disparity is true? And will this disparity disappear over time, absent legislation, as Hispanics become further integrated into society? These questions imply their own answers.

‘Markup’ vs. Retail Margin in Pricing

The varying levels of pricing along the commercial conduit are cost, wholesale price and retail price, which shouldn’t be a surprise to anyone. The producer of the product sells the product to an intermediary, or middleman, who then sells it to the retailer at wholesale. The retailer, as one would expect, sells the product to the consumer at the retail price.

That retail price is the wholesale price plus the retail margin or profit margin. It is not the pejorative “markup.” No one along this path of commerce is going to sell a product and not enjoy a profit. If such a party did, it would not survive economically, and the availability of goods and services would disappear to the consuming public.

Detractors of the automotive industry decry this retail margin as often unfair and a deceptive “markup.” It is not. Dealers should avoid using the term “markup” because it is depreciatory and arms industry critics.

Auto Add-Ons Add Up

Ever wondered how dealer discretion purportedly drives excessive, arbitrary and discriminatory pricing? The National Consumer Law Center (NCLC), a consumer advocacy group, has produced a studyentitled “Auto Add-Ons Add Up,” which asserts that the sale of certain ancillary products leads to inconsistent pricing and discrimination. The study urges investigations and legal redress of what the NCLC considers arbitrary and discriminatory pricing.

The NCLC study is not sympathetic to the ancillary product industry as it asserts that “many have questioned the value of these products.” The study analyzes approximately 1.8 million transactions and reaches certain conclusions and recommendations.

The study reached four conclusions, which are not compelling:

  • Ancillary products are sold at far higher prices than dealer costs. One could easily recast this assertion as it relates to jewelry, pharmaceuticals, or many other products. Is this a remarkable finding?
  • The pricing of ancillary products is inconsistent (at the same dealer or from dealer to dealer): The pricing of all products is inconsistent and it is a matter of degree. One need only contrast the cost of gasoline, milk or mushroom soup from retailer to retailer to reach this conclusion. At the same Chevrolet dealership, the price of an Impala, for example, will differ from one customer to another. Is it wrongful for dealers and consumers to negotiate differing prices?
  • Inconsistent ancillary product pricing produces pricing discrimination. Intentional discrimination is illegal and should be prosecuted. But inadvertent results — where neither the dealer nor the financing source is aware of the result — should not be actionable under present law. Moreover, F&I managers negotiate with everyone, race or ethnicity notwithstanding, and attempt to maximize profit. It is the American way.
  • Financing sources allow for “excessive and discriminatory markups of auto add-ons”: This is one of the central assertions which led to the CFPB’s ill-advised disparate impact actions. How can a financing source be held accountable for results which cannot be known at the time of contracting and underwriting? And what is excessive pricing?

The Study’s Recommendations and the Author’s Response

The study’s recommendations are not, altogether, draconian. The study’s first recommendation is that ancillary products and their non-negotiable prices should be posted along with the Monroney label. These prices should be the same for all customers.

My response to the first recommendation is that it is impractical. Dealers should follow the 300% rule by disclosing 100% of all available products to 100% of their customers 100% of the time. Secondly, in cases where ancillary product pricing is flexible, dealers should have latitude in pricing to fit the product to the customer’s needs.

Menu selling, where the base price is clear, will provide helpful disclosures to customers. It is recommended that all menus be signed and a menu log be maintained. It would also be a sound practice to have a protocol where flexibility in pricing is limited to a certain percentage. It would be a defense to allegations of discrimination.

The study’s second recommendation is that the Equal Credit Opportunity Act should be amended to require the customer’s race and national origin to be documented. My response is that this is a national public policy decision. It will lead to prosecutions, litigation and class actions for the purpose of rooting out alleged classwide discriminatory results. It is the current law in mortgages, but should it be the same for vehicle transactions?

The study’s third and final recommendation is that federal and state regulators should investigate and prosecute ancillary product pricing discrimination. My response? There is no justification for intentional discrimination and it should be prosecuted.

The good news is that the NCLC study will probably not have much impact in the present political climate. However, should the political environment change, it could be otherwise. On Wall Street, the adage “Pigs get fat and hogs get eaten” is applicable here. Allowing F&I managers to be too aggressive in pricing ancillary products may lead to regulatory reprisals. Dealers should be provident. Govern yourselves accordingly.

Finally, a personal note: I have appeared as a speaker on several occasions in the past for the NCLC and participated as an active member of the NCLC’s auto fraud list serve during my tenure with the Florida Attorney General’s Office. I have the highest respect for the NCLC’s motives, its series of consumer law manuals, and the professionals who work there. With that said, however, I strongly disagree with this particular study.