Free-market advocates are joining Tesla’s fight against state “franchise laws” requiring that new vehicles be sold through licensed dealerships, saying they are bad for consumers.
In addition to banning manufacturers from selling new vehicles directly to the public, franchise laws also mandate exclusive territories for dealers and make it difficult for manufacturers to terminate dealers, all of which serve to insulate dealerships from normal market pressures.
Until recently, the dealer model was widely accepted, but franchise laws have become subject to renewed scrutiny with the arrival of electric carmaker Tesla and its direct-sales strategy. This strategy has led many consumers to wonder why they are required to pay a dealer markup when purchasing a vehicle.
According to Reuters, Tesla CEO Elon Musk visited Texas last week to urge repeal of the state’s franchise laws, which he called “un-Texan,” pointing out that they exist solely to protect dealerships from competition, often to the detriment of consumers.
“All I want to do is give the people in Texas the right to choose how they buy their cars,” Musk told state lawmakers. (RELATED: Texas Gov. Rick Perry Wants Tesla in Texas)
In a study published by the Mercatus Center at George Mason University on Tuesday, Jerry Ellig and Jesse Martinez contend that, “These state laws harm consumers by insulating dealers from competition and forestalling experimentation with new business models for auto retailing.”
“Musk is betting that Tesla employees can learn about the car’s new technology and sell more effectively than traditional independent dealers paid on commission,” Ellig and Martinez explain, but “state laws prevent him from finding out.” (RELATED: Republicans are Responsible for Most State Tesla Bans)
Auto franchises began as voluntary agreements between manufacturers and retailers, but over the course of several decades, they became mandatory in all 50 states. This allowed lawmakers to “extensively regulate the contractual obligations between manufacturers and dealers.”
Franchise laws are intended to benefit consumers by establishing a profit motive for dealers to “provide valuable services that some manufacturers are unwilling or unable to provide,” but whereas voluntary franchise arrangements indisputably benefit consumers, state-mandated agreements “virtually always harm the consumer.”
One of the main problems with franchise laws, they say, is that “manufacturers can no longer adopt other business models if circumstances change,” leading consumers to “suffer higher prices and less convenience as a result.” (RELATED: Pro-Tesla Bill in Pennsylvania Angers Fellow Automobile Manufacturers)
The ubiquity of franchise laws makes it difficult to estimate their effects by comparing prices, but a study using data from 1972, when fewer states imposed such restrictions, determined that franchise laws added about 9 percent to the price of new cars in a state.
Similarly, laws restricting the ability of manufacturers to terminate dealership arrangements generally do not consider improving the efficiency of a dealer network “good cause” for termination, which prevents manufacturers from restructuring their dealership networks to adapt to new economic realities.
In the aftermath of the 2008 financial crisis, for example, GM and Chrysler each proposed eliminating hundreds of dealerships as a way of achieving the “long-term viability” required as a condition of the auto bailouts. However, “dealers wasted no time petitioning Congress,” which dutifully responded with legislation allowing them to appeal the terminations, resulting in the closure of just 111 dealerships. (RELATED: GM’s Tricky Payback)
If franchise laws truly benefit producers and consumers, Ellig and Martinez conclude, then “the current franchise system should not need the legal protection it enjoys in every state.” That such protections do exist, though, shows that “state auto franchise regulations institutionalize anticompetitive pathologies.”
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