The Car Dealer Oligopoly
by Fred E. Foldvary, Senior Editor, 21 July 2013An oligopoly is an industry in which there are only a few sellers. In some of the states of the USA, car dealers have a legal oligopoly on retail shops, as car makers are not allowed to sell directly to customers.
This oligopoly reduces the ability of new car makers, such as Tesla, to sell its cars. According to a study by Gerald Bodisch, based on an average vehicle price of $26,000, the total cost reduction for a direct sale by the car maker has been estimated as $2,225 or about 8.6%. The Tesla electric car is, at present, rather expensive, selling for $70,000 if sold directly to buyers. But if Tesla has to operate through local car dealers, their car sells for thousands of dollars more.
In the early days of car making, selling through dealerships offered benefits to manufacturers. The franchise system allowed car makers to concentrate their resources in production, while earning franchise fees from independent retail sellers. But now, the Internet has reduced some of the beneficial aspects of the franchise system for manufacturers, as reviews and other information provided by local dealers has become readily available on web sites.
A political battle is now occurring in state legislatures between Tesla and the franchised dealers. It does not matter whether the Republican or the Democratic party controls the legislature, as the dealers contribute campaign funds to both parties to keep their franchise privilege.
State franchise laws were enacted in the early days of the automobile, when Henry Ford was cranking out cars. Now, intermediaries such as retail stores are coming under increasing competition as the Internet enables many producers to sell directly to the public. People can also buy from mass sellers such as Amazon.com and QVC at web sites or by telephone for less than they would at a store. Package deliverers have gotten much more business.
Technological improvements drive a market economy towards better and cheaper goods. Old methods such as riding horses get replaced by new ones such as the automobile. Electronic readers are now substitutes for paper-based books. The Dell company pioneered the direct manufacturer distribution of computers, which reduced inventory costs. The Austrian-school economist Joseph Schumpeter called the dynamics of new goods and methods replacing old ones “creative destruction,” although it is better called “creative reconstruction.” But progress is blocked when governments protect the old ways from creative reconstruction.
Car dealers fear that if Tesla can sell directly to customers from company-owned stores, then other car makers will do so also. There are 48 US states that have laws restricting car dealerships. However, according to an article in the 18 June 2013 Wall Street Journal, Tesla may have company-owned stores in California, the District of Columbia, Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania, and Washington. Tesla may only own one store outlet in Colorado and Oregon.
Tesla may operate galleries in Arizona, Texas, and Virginia, where one may look but not test drive or buy. In Texas, the gallery may not inform a customer of the price of the car, and they may not even give out the Tesla web site address, which is silly, because one can easily look it up. Tesla may not own stores or galleries in the other states. In those states, a customer may order a car by telephone or from a web site, but most car buyers want to physically examine a car and have a test drive. Arizona even prohibits manufacturers from selling not only vehicles, but also parts, services, and financing directly to consumers.
Legislation may become even more restrictive, as, for example, legislation has been proposed in New York state not only prohibiting direct sales by Tesla, but also prohibiting the cars bought in other states from being registered in New York.
There are also federal laws regulating car dealerships, such as the 1956 Automobile Dealers' Day in Court Act (Federal Automobile Dealers' Franchise Act), 15 U.S.C. §1221-25, by which dealers may sue automobile manufacturers in federal court for damages if a manufacturer terminates or does not renew its dealers' franchises. The courts have upheld state statutes that prevent manufacturers from selling vehicles directly to consumers. The National Automobile Dealers Association has vowed to vigorously defend their franchises against any attempt by the Tesla company to have federal legislation that overturns the state restrictions.
NADA claims that if manufacturers sell directly and will not let independent dealers sell, this would reduce competition. However, they do not advocate a law that would let the car makers sell and also prevent the car makers from excluding other sellers.
A major reason why local governments are allies of the car dealers in keeping their monopoly privilege is the sales tax. The sale of cars generates much of the sales tax revenues that the state and local governments depend on. The car dealers contribute campaign funds to local candidates to influence them to be in favor of keeping the oligopoly privileges. Company-owned retail outlets would also pay sales taxes, but the lobbying power by existing dealers is greater than that of start-up firms such as Tesla.
The DeLorean car of the 1970s sold cars via dealerships that invested in the company and became shareholders. But such a strategy does not provide the cost savings of direct sales.
Automobile entrepreneurs are seeking to produce cars that pollute less and are more energy efficient, but progress will be blocked if government prohibits cost savings such as direct sales by manufacturers.
Mike Ramsey and Valerie Bauerlein. “Tesla Clashes With Car Dealers,” 18 June 2013 Wall Street Journal, pp. B1 - B2.
“Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers” by Gerald R. Bodisch, May 2009 (http://www.justice.gov/atr/public/eag/246374.htm)
-- Fred Foldvary
Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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