Why do car manufacturers offer dealer incentives?

• A. To discourage dealers from selling cars below the manufacturer's suggested retail price.
• B. To increase the market price of cars and reduce competition among dealers.
• C. To encourage dealers to sell more cars by reducing the effective price, thereby increasing consumer surplus and matching consumers' willingness to pay.
• D. To decrease consumer surplus by making cars less affordable to buyers.

Answer: (C)

Verified step by step guidance

1. Understand the role of dealer incentives: These are discounts or financial benefits offered by manufacturers to dealers, aimed at influencing dealer behavior.
2. Recognize the goal of dealer incentives: They are designed to encourage dealers to sell more cars by effectively lowering the price dealers pay, which can be passed on to consumers.
3. Analyze the impact on consumer surplus: By reducing the effective price, dealer incentives increase consumer surplus because consumers can purchase cars at prices closer to or below their willingness to pay.
4. Consider market competition: Dealer incentives help dealers compete more effectively by allowing them to offer better deals without reducing the manufacturer's suggested retail price directly.
5. Conclude why manufacturers use incentives: They aim to boost sales volume and better match supply with consumer demand, rather than to discourage price competition or increase prices.