Policy Research

State Automobile Franchise Laws: Public or Private Interests?

T. Randolph Beard, George S. Ford

Summary

This article explores the costs and benefits of state policies’ that require new vehicles to be sold from independent dealerships. The public and private interest in keeping, or repealing, these policies are debated using new evidence as well as material from the Federal Trade Commission (FTC). Rebuking the argument that independent franchising gives the dealerships greater market power, the authors argue that the state franchising laws are protectionist, dated, based off of flawed data, and inefficient. Using Michigan as an example, they explain how the shear economic power of the auto industry might be influential over the state legislature. As franchising laws benefit the manufacturers they also increase the revenue stream of the state. Dealerships raise the costs of vehicles thus raising the tax the consumer has to pay. But there are also benefits of franchising laws. Instead of having to deal directly with the manufacturer, where the consumer has little power, the consumer can negotiate with a dealership over prices, benefits, and other relevant concerns. Consumers gain a net benefit from negotiating, or “bundling,” both price and service agreements with dealership versus the manufacturer. The manufacturer has no interest in negotiating service costs/requirements because they make no profit from servicing vehicles. Here the franchise laws play a critical part. The current method with all these drawbacks does still act in the public interest. It gives consumers greater bargaining power and provides a way to keep manufacturers accountable.

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Policy Implications

Although the Franchising laws have benefits for consumers, they also have their drawbacks. This system nurses inherent inefficiency and stifles competition. The policies decrease the options consumers have when purchasing a vehicle. Because this economic model of franchising is old, inefficient, and biased towards the manufacturers, it must be studied, reviewed, and if need be adjusted or replaced. The study that the FTC uses to justify the continuation of this policy is nearly thirty years old and based off of data from 1978. If the policy remains the same vehicle manufacturers such as Tesla will have to either submit to the policy, lobby for a change, or challenge the law in court.