Automakers and dealers are playing a game of chicken — and customers could be the winners

• Automakers and dealers have kept prices high and inventory low for years.
• Now, the tables are turning and the two are at odds over incentives and markups.
• Consumers may be poised to win as carmakers and their retailers battle it out.

Automakers and dealers are playing a game of chicken over how much a car should cost right now — and customers might come out the winners.

Some dealers have a surplus of cars on their lots as inventory levels bounce back after years of constraints. They want to sell those cars faster through discounts and other incentives.

But automakers aren't letting them pull those levers. They want to keep prices — and profit margins — high. (And new car prices are still quite high — the average transaction price landed at a whopping $47,409 in April — up $10,000 from pre-COVID times, according to Cox Automotive).

At the same time, consumers are tightening purse strings as inflation persists and wages remain stagnant.

"Now it's this game of chicken and who's going to blink first?" Brian Finkelmeyer, senior director of new car solutions at Cox, told Insider.

Dealers generally don't like having a surplus of cars on their lots. They've gotten used to selling vehicles above sticker price for high margins with low inventory. But as the tables turn, tensions with their automakers are coming to a head.

"You have the dealers on one side that are sitting on this inventory and they're looking at their manufacturing partner saying, 'when are you going to bring back incentives?'" Finkelmeyer said. Car companies meanwhile are looking out for their own profit margins and looking for ways to keep inventory low without spending on big discount packages like they have in the past.

Car companies are trying not to fall back on discounting

After years of COVID-related plant shutdowns and a prolonged chip shortage that squeezed supply, car companies are trying hard not to fall back on the old habit of relying on expensive discount programs to thin out bloated dealer lots.

Instead, some are turning to more creative solutions. Dealers had a much higher supply of Ford F-150 and Chevrolet Silverado pickups at the end of April than they did popular vehicles like the Toyota RAV4 or Corolla. So much so that GM was willing to pause truck production to keep supply low.

Historically, a company like GM wouldn't consider changes to production and instead move excess inventory with end-of-month deals, said Jessica Caldwell, an automotive analyst for car-shopping website Edmunds.

"Car companies are in uncharted territory here," Caldwell said. "I'm sure they're writing the playbook as we speak, looking at 'how did shutting down that assembly line work for us and how does it compare to incentives?'"

Higher interest rates make everything more painful

Meanwhile, dealers are spending more to keep cars sitting. Dealers borrow against the inventory they hold on their lot in what's referred to as a "floor plan." With interest rates rising, the cost of holding onto unsold cars is getting more expensive.

"That's going to put more economic pressure on the dealers to say, 'We can't be sitting on these cars for 150, 180 days. We need to begin discounting,'" Finkelmeyer said.

To make matters worse for dealers: Without discounts to ease rising interest rates, more customers are delaying their purchases and hoping to wait out the interest rates. If and when car companies start spending more on incentives, they are likely to target interest rates, Caldwell said.

"Car companies know very well how expensive interest rates are getting for their customers," Caldwell said, "so I think it's likely we will see any incentive spending go there."