Supply and Demand: Small Cars Command Bigger Prices

(MoneyWatch)  Higher demand for fuel efficiency is driving up small-car prices in a couple of ways.

First is simple supply and demand. Toyota said on July 1 it had only a one-day supply of the Toyota Prius hybrid ?€" meaning in effect that it is sold out, and has a waiting list. That kind of demand usually spells what the auto industry calls "gouging," or charging more than sticker price.

Bob Carter, Toyota Division group vice president and general manager, admitted in a July 1 conference call there are what he called "rare examples" of Toyota dealers charging more than the manufacturer's suggested retail price for the Prius. But he insisted that data from the Power Information Network shows that on a nationwide average, the actual transaction price is slightly under MSRP.

Second, car company executives said that anecdotal evidence suggests customers who are trading in bigger vehicles for smaller, more fuel-efficient ones are ordering small cars with all the optional bells and whistles, and that also drives up transaction prices.

Third, a couple of the best-selling small cars are newly redesigned, which also helps boost prices. The redesigned 2009 Toyota Corolla went on sale in February. Ford introduced the 2008 Focus last fall.

According to the Power Information Network, a subsidiary of J.D. Power and Associates which gets finance data directly from dealerships, the average transaction price for the Corolla was $17,263 year to date, from Jan. 1 to June 22. That was about $1,500, or 9.5 percent, higher than the first half of 2007. For the same time frame, Ford Focus prices increased $666, or 4.6 percent.

"The direction of the industry is higher prices, and you're going to lean into the direction of the hot segments, and that's small cars right now," said Mark LaNeve, vice president, GM North America vehicle sales, service and marketing.