(This article was published on Forbes.Com and is reprinted with permission by the author.)
By Jeffrey Dorfman
Professor of Applied Economics
University of Georgia
U.S. antitrust laws are a fascinating confusion of logic and nonsense. Supposedly designed to protect consumers, the antitrust laws seem to be used just as much to settle battles between dueling retailers or between retailers and manufacturers. In too many cases, the government steps in to block actions that would appear likely to be good for consumers. The latest case is the spreading war by car dealers to block Tesla sales using state legislatures as their anti-consumer instrument.
Tesla Motors sells a very expensive all-electric car and its business plan involves direct-to-consumer sales. Tesla invested considerable money, thought, and time in designing a showroom and a sales process (fixed price, no negotiating, and no commissions) to make its target customers comfortable and close sales smoothly.
Automobile dealers are not amused, since this leaves them completely out of the process, with no chance to earn profits either from the new car sales or the potential trade-ins. The Tesla sales model does not give me or you a chance to profit either, but the difference between the National Automobile Dealers Association and us is that NADA has access to politicians in state capitols all across the country.
So far, Tesla’s direct sales have been blocked in New Jersey, Texas, Colorado, and Arizona, with battles ongoing in New York, Massachusetts, Virginia, North Carolina, Minnesota, Georgia, and Ohio. (Editor’s Note: A bill that would have limited Tesla’s competitiveness died in the 2014 Georgia General Assembly.) Expect the battlefield to continue to spread as auto dealers use their political power (and campaign contributions) to secure a piece of the action.
The car dealers claim that the dealer model is good for consumers because they can compete on price with other dealers on new car sales, trade-ins, and financing terms. However, these claims ring hollow.
Under U.S. law, manufacturers can control the retail price of their products under certain conditions. The most common is called Colgate pricing. Under Colgate pricing a company can control the retailers it allows to sell its products, the price, when it can be discounted (if ever), even how the product is displayed in the store. As long as the manufacturer specifies its conditions up front, the retailer must either take the deal or pass and not sell the product in question. You probably experience such behavior without realizing it when you shop for certain brand name clothes and fashion accessories.
Manufacturers understand that forcing retailers to hold the line on price likely means lower sales volumes, but believe that they gain reputation as a “quality” brand and can earn more from fewer, higher priced sales than if they allowed retailers more freedom. Such behavior does not benefit consumers, as Colgate pricing is specifically designed to be anti-competitive and to maintain higher prices than would otherwise appear in the marketplace. Yet it is legal and would seem to mean that Tesla should be allowed to pursue their chosen sales approach.
After all, if Tesla could force retailers to sell only at a specific price, then from the consumer’s point of view including a retailer separated from the manufacturer adds no advantage. All the retailer does is siphon some profit away from the manufacturer, or, worse, lead to a higher retail price.
The auto dealers’ claim that they will bring price competition to the process is weakened by the presence of existing competition from other luxury car dealers. Given that Tesla’s Model S costs from $70,000 to $90,000 depending on options it seems likely that their customers are well-educated and financially competent. They understand that other luxury cars are for sale and can easily find out the prices of those competitors. If Tesla is charging an unreasonable amount for their car, customers can buy a different model. The idea that competition between Tesla dealers would be fiercer than the competition between, say, Tesla, BMW, and Mercedes dealers is unlikely. Tesla customers are also quite able to sell their old cars to an auto dealer if they choose.
Similar restraints exist for other auto manufacturers. If you use a car company website to custom build the exact model you want, it will display a price, but any sale will come through a selected local dealer. Here the manufacturers have franchise contracts signed with the dealers, so while the restrictions may be anti-free market at least the manufacturers agreed to them in writing.
Auto dealers are not looking to help consumers; rather, they simply want to capture more profits for themselves. The proof is the money the auto dealers are spending to secure their victories in state legislatures. The only reason to spend money to secure legislation is because that legislation will capture profits that will more than replace the money spent. If consumers end up winning as part of that process, car dealers certainly will not mind, but that is not their aim.
We economists call such behavior rent seeking. Auto dealers are certainly far from the only group engaging in such behavior through the American legislative process. Such behavior is not good, but it is legal. However, the car dealers go too far when they try to cloak their self-serving behavior in a veneer of pro-consumer respectability. Let the NADA fight through state legislatures against Tesla and its billionaire CEO Elon Musk. But the auto dealers should leave consumers out of their argument because in this fight Tesla is the one closer to the side of the consumer.
(Jeffrey Dorfman is a professor of agricultural and applied economics at the University of Georgia. Dorfman has taught and written about economics for 25 years. This is his first article republished on the Foundation Forum. The views in this article are those of the author and not of the Policy Foundation. This article was originally published by Forbes.com.)