FTC directors say states should scrap dealership laws
In a blog post on the FTC’s site, Andy Gavil, Debbie Feinstein and Marty Gaynor (directors of, respectively, the FTC’s Office of Policy Planning, its Bureau of Competition and its Bureau of Economics) argue that state laws enacted during the auto industry’s infancy to correct what was then “a perceived imbalance of power between the typically small local dealers and major national manufacturers” have outlived their usefulness; are not needed to prevent abuses of local dealers; and, in any case, should have no relevance to a company like Tesla, which the authors note, “has never had any independent dealers and reportedly does not want them.”
It’s actually more than just “reportedly.” Tesla Chairman and CEO Elon Musk has elaborated at length about why the company wishes to eschew independent dealerships, most recently in this screed directed “to the people of New Jersey” after the New Jersey Motor Vehicle Commission made clear that it would not allow Tesla to sell vehicles directly to consumers.
In it, Musk claims dealers face “a fundamental conflict of interest between promoting gasoline cars, which constitute virtually all of their revenue, and electric cars, which constitute virtually none,” additionally citing “an even bigger conflict of interest with auto dealers is that they make most of their profit from service, but electric cars require much less service than gasoline cars.”
To give credit to the FTC, the regulators’ concern actually long predates the birth of Tesla. As far back as 1986, the FTC published this study by economist Robert Rogers that found state-level auto dealer laws raised consumer prices by an average of 6 percent. In their post, Gavil, Feinstein and Gaynor note that innovations in consumer-directed business models brought about by the rise of the Internet could potentially revolutionize the auto distribution business, if only states would permit it:
How manufacturers choose to supply their products and services to consumers is just as much a function of competition as what they sell—and competition ultimately provides the best protections for consumers and the best chances for new businesses to develop and succeed. Our point has not been that new methods of sale are necessarily superior to the traditional methods—just that the determination should be made through the competitive process.
Change is a critical dimension of that competitive process. Manufacturers in a variety of industries now reach consumers directly through websites, providing extensive information that was once only available from dealers or by phone or mail inquiry. And consumers routinely turn to the Internet as a convenient way to comparison shop and buy products and services.
Such change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors. Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are—expressions of a lack of confidence in the competitive process that can only make consumers worse off.
For its part, the National Automotive Dealers Association provided a boiler plate response to the FTC post, claiming that:
“For consumers buying a new car today, the fierce competition between local dealers in a given market drives down prices both in and across brands – while if a factory owned all of its stores it could set prices and buyers would lose virtually all bargaining power,” said Jonathan Collegio, NADA vice president of public affairs. “And buying a car isn’t like buying a pair of shoes online. Cars require licensing to operate, insurance and financing to take home, and contain hazardous materials, so states are fully within their rights to protect consumers by standardizing the way cars are sold.”
Leaving aside the trailing non-sequitir – which begs pondering what state regulation of driver’s licenses, insurance, auto financing or hazardous materials could possibly have to do with allowing a car maker to sell directly to consumers – the appeal to “fierce competition between local dealers in a given market” is particularly rich. As Francine Lafontaine and Fiona Scott Morton detailed in a 2010 paper on franchise laws published in the Journal of Economic Perspectives, 47 states have on the books “anti-encroachment” laws that prohibit manufacturers from establishing new dealership relationships within a given “relevant market area.” Not only is the auto dealership market not especially competitive, but it is illegal for it become competitive!
Lafontaine and Morton’s paper took the opportunity to reflect, given the utter collapse of the U.S. auto industry, on a number of alternative business models that could flower, if only U.S. law permitted them. These include the model General Motors uses in Brazil to market the Chevy Celta: small showrooms that contain just two cars (one for display and one for test drives) and that give consumers the opportunity to order one of 20 possible configurations of the vehicle.
Lafontaine and Morton also note the failed “Built to Order” experiment from former CarsDirect.com CEO Scott Painter, who wanted to give consumers the opportunity to assemble parts bought directly from major suppliers that would then be attached to a GM powertrain, at about a 30 percent discount from the manufacturer’s suggested retail price of a comparable car. (For a more detailed account of the frustrations Painter experienced, check out this February 2013 podcast from NPR’s Planet Money.)
The authors conclude, somewhat fatalistically:
In other retail sectors, we see manufacturers that primarily use company-owned retail outlets (like Starbucks) and others using mostly franchising (like Dunkin’ Donuts). Some franchisors use significant numbers both of company stores and franchised stores (like McDonalds). Why firms choose to organize their distribution differently, and why franchisors rely on franchising to a different extent, has been the subject of much scholarly work…When the automakers decided to sell their cars through independent dealers, they did so based on what they judged was good for their industry at the time. They cannot now adjust this business decision, even if the market dictates that they should.