Automobile dealerships have been the beneficiaries of state laws that require maker-dealer contracts with restrictions blatantly favoring the profits of dealers over the welfare of consumers.
The automobile manufacturers’ market is no longer concentrated as it once was, an attribute that we usually associate with price competition, but state regulations governing the maker-dealer supply channel constrict the level of competition among dealers offering the same make, according to a new study by the American Consumer Institute.
In 1956, a federal law was adopted to limit carmakers from terminating dealerships and to prevent makers from forcing dealers to purchase vehicles from manufacturers. Since then, state laws have woven a thicket of regulations that protect dealerships but harm consumers by raising car prices.
Regulations have become engorged, making it nearly impossible to terminate bad dealerships. In the wake of the great recession, auto sales dropped to 11 million units/year and auto makers were desperate to cut inefficiencies by right-sizing their dealership fleet. They proposed terminating dealerships with poor sales volume and high costs. Despite complying with existing regulations for termination, the makers met fierce resistance from state legislators and fell significantly short of their goals. In the end, higher regulatory costs and market inefficiencies simply flow through to consumers in the form of higher automobile costs.
Manufacturers’ warranties reimburse dealerships for labor and parts, and many state laws allow for very high markups on reimbursement, and in some cases, markups that can double the “list price” for parts. While manufacturers are required to pay these high legislatively permissible markups, consumers too pay these costs through higher automobile prices. In addition, these higher markups also hit consumers going to dealerships for services and repairs not covered under warranty. It would be good to hear an explanation for why dealers charge so much for parts.
In 49 states, dealerships now have monopoly market areas that work to reduce intra-brand rivalry. This exclusivity results in required geographic spacing of a maker’s dealerships. Of course, less competition means higher prices, and the empirical data confirms this. According to an econometric study, the price of a Honda Accord was found to increase by $220 and by $500 when dealers were 10 and 30 miles apart. The greater the distance, the higher the price consumers had to pay. These geographic monopolies allow dealers to price substantially above costs, making consumers pay more than they would in a competitive market.
State regulations often require new vehicle sales through local dealership networks, ostensibly to handle safety recalls and the availability of spare parts. This required dealership middleman increases the cost of market entry for innovative auto makers (such as Tesla or Coda), and in turn, it increases the cost confronting consumers. As the Federal Trade Commission puts it – “consumers – not regulation – should determine what they buy and how they buy it. Consumers may benefit from the ability to buy cars directly from manufacturers.”
By one estimate, simply ending state laws that protect monopoly territories would result in 7.6 percent lower prices and bring 2 million more vehicles to the U.S. market — a 10.3 percent stimulus in demand. That stimulus would mean more workers in the factory and more workers at the state dealership. But these laws aren’t designed to help state employment, they were designed to increase the profits of the wealthy owners of dealerships who contribute to state legislative campaigns. It’s welfare for the rich.
According to the ACI study, removing just the territorial restrictions to market entry would produce consumer benefits of roughly $50 billion per year. This figure does not include the many other franchise-friendly regulations that work to make vehicles more expensive and transfer income from consumers to car dealerships.
Consumers deserve to have the benefit of real competition restored. As the FTC observed, “It is not the role of regulators to prop up poorly performing businesses, particularly since the resulting laws serve only to undermine competition and lead to reduced consumer benefits.”
Alan Daley writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmerican.Consumer.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.