Every state has laws on the books that increase vehicle costs, essentially transferring income from the buying public to car dealers. The problem is so widespread that American consumers collectively pay $47.5 billion more per year than they would in the absence of these regulations, according to a recent study by the American Consumer Institute.
Laws governing car manufacturer/dealer relationships arose in response to concerns that car manufacturers would take advantage of vulnerable dealers by forcing them to buy inventories of new vehicles they were unlikely to sell or exploiting them in other ways.
Common regulations include franchise licensing requirements, exclusive territories, and dealer termination provisions, all of which proliferated rapidly in the late 20th century. In 1979, fewer than half of states had all three of these rules. By 2014, all but one state regulated every single one of these aspects.
Territorial exclusivity laws protect dealerships by establishing monopoly market areas that reduce intra-brand rivalry. They limit market entry and reduce price competition between dealers selling the same brands and models, thereby leading to higher consumer prices and increased dealership profits. A study in 2015 estimated that these laws increased the price of a Honda Accord by $220 when dealers were 10 miles apart and $500 when dealers were 30 miles apart.
Another form of regulation constrains dealership termination. Generally, states do not allow manufacturers to terminate dealership contracts for gross inefficiency of financial conditions. Even when good cause for termination is present, laws often provide dealers time to remedy shortfalls, making termination difficult and costly. To make matters worse, manufacturers are usually required to buy back unsold cars, parts, equipment, and accessories, raising the cost even further.
State lawmakers have adopted these regulations, despite the absence of evidence of market failure that would justify government interventions. Manufacturers and dealers rely on each other to be successful. Without profitable dealerships, manufacturers cannot sell their products. That was true a century ago and it remains true today. Given this interdependence, manufacturers have no incentive to exploit dealers, who could easily exit the market, resulting in a financial loss to the manufacturer.
The result of all these laws is to increase profits for car dealers by making it difficult for manufacturers to experiment with new methods of auto sales, close unprofitable and inefficient dealerships, or streamline their operations in face of changing market conditions.
Although some have characterized car dealerships as struggling small businesses needing government protection, the empirical evidence suggests that car dealerships overall are financially sound, averaging about 30 percent return on equity for domestic sales. In fact, several car dealers have become billionaires, and the industry’s success has attracted investment from Warren Buffett. By contrast, the automobile manufacturing industry’s profits are reportedly insufficient to recover its return on capital.
A study by the Federal Trade Commission examined data from Chevrolet dealerships to calculate the effects of restricted territorial and market entry on vehicle prices. The authors concluded that the laws had a detrimental effect on consumers, increasing prices by about 6 percent. By the study’s admission, these estimates significantly understate the total costs that regulations have on consumers, since other anti-competitive laws were not examined.
All evidence points to the fact that the current regulatory framework around car dealerships raises their profits by stifling market forces. As a result, American consumers are overcharged by tens of billions of dollars every year.
It’s time for lawmakers to reform this broken system and level a playing field that has been skewed for far too long.
Liam Sigaud writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.