Last week I wrote about the efforts of New Jersey and other states to prevent Tesla from selling cars directly to the public without using dealers as an intermediary. Now, Alex Tabarrok has great post on the dealers laws and their effects on competition and consumer welfare. It is not a happy story. Here is an excerpt:
So there you have it, [according to the New York Times] limits on direct sales ensure competition and protect car dealers from being undercut by the automakers. Sorry, but you can’t have it both ways.
Franchising arose early on in the history of the auto industry because, as in other industries, franchising can take advantage of local knowledge and at the same time control agency costs. Franchising rules evolved in Coasean fashion so that manufacturers could not expropriate dealers and dealers could not expropriate manufacturers.
Politics, however, began to intrude into this Coasean world in the 1940s and 1950s [to the benefit of dealers who had more political power].
The result of dealer rent seeking has been higher auto prices for consumers, about 6% higher according to one (older) study by the FTC.
The franchise laws have also resulted in a highly inefficient distribution of dealers as populations have moved but dealers have been frozen into place. The inability to close, move or consolidate dealers has impacted the big-3 American firms especially because they have older networks. As a result, a typical GM dealer sells 377 cars a year while a typical Honda dealer sells 1,062 and a Toyota dealer 1,488.
This last point illustrates how government interventions create problems which call for additional government interventions. The dealer laws have hurt the big 3 American auto firms, who have sought government interventions in the form of import restrictions and more recently government bailouts.