Center Files Amicus Brief Endorsing The Economic Analysis Undergirding the FTC’s CARS Rule.

June 4, 2024

If you’ve ever purchased a car, you know that it is one of the most complicated, frustrating, and opaque consumer transactions—and one that is rife with junk fees and deceptive sales tactics. The Federal Trade Commission recently issued a landmark regulation, the Combating Auto Retail Scams (CARS) Rule, to tackle these problems and to mandate transparency and fairness in the vehicle buying process. And as the Center explained in an amicus brief filed recently in the Fifth Circuit on behalf of five economics professors in support of the CARS Rule, the FTC’s objectives are well-supported by bedrock economic principles and will promote greater efficiency in the motor vehicle industry.

Background: Buying a car is for many one of the most dreaded consumer experiences in modern American life. The vehicle market has long been characterized by undisclosed fees, needless add-ons, and unscrupulous dealers who lure buyers to the lot with the promise of one vehicle at one particular price and set of characteristics, and then procure a vehicle and charge a price above what they advertised. And that's before they get to the financing.

 The lack of transparent and predictable pricing across the vehicle market drives up the costs of the overall transaction to consumers, who often spend hours beforehand trying to compare prices and products, and then additional time—and money—at auto dealerships in a seemingly endless transaction. A lack of price transparency in the market enables dealers to raise prices without significant repercussions and creates an economically inefficient market. Consumers end up paying much more for a new or used car than they would if dealers were forced to be honest and transparent about their pricing practices from the get-go.

To address these persistent and systemic problems, and in response to specific authorization in the Dodd-Frank Act of 2010, last year the FTC promulgated the CARS Rule. The rule takes aim at two common practices consumers face when buying a car: bait-and-switch tactics and hidden junk fees. In addition to prohibiting misrepresentations about key information, the Rule mandates disclosures about vehicle price, payments, and add-ons; prohibits charges for add-on products and services that offer no benefit to the consumer, and requires dealers to obtain consumers’ express informed consent for incurring any additional charges.

The FTC conservatively estimates that the Rule will save consumers nationwide more than $3.4 billion and 72 million hours each year shopping for vehicles. National and Texas trade groups representing automotive dealers, however, challenged the CARS Rule directly in the Fifth Circuit Court of Appeals as arbitrary and unreasonable, specifically criticizing the FTC’s cost-benefit analysis of the Rule’s anticipated economic impact.

The Center’s Brief: The Center filed an amicus brief in defense of the CARS Rule on behalf of five professors –– Neale Mahoney of Stanford University, Charles Murry of Boston College, Babur De Los Santos of Clemson University, Tobias Salz of the Massachusetts Institute of Technology, and Matthijs Wildenbeest of the University of Arizona –– all economists with expertise in consumer economics and the motor vehicle industry. The brief argues that the FTC properly applied foundational economic principles in designing the CARS Rule, and that the Rule’s anticipated reductions to overall car prices and costs to consumers are firmly supported by economics research. By requiring advertised vehicle prices to match actual prices, the Rule will likely lower the overall cost, saving consumers time and money and minimizing the economic harm to society due to inefficient pricing (a concept known as “deadweight loss”). The brief adduces studies supporting the FTC’s approach and conclusion. It also notes that the Commission's economic analysis is not—as a matter of law––open for judicial re-examination.

We hope that the Fifth Circuit agrees that basic economics warrants regulation to ensure transparency in the motor vehicle market.