Commentary

Wither Dealerships?

By Solveig Singleton
August 2, 2000
Especially for younger consumers, buying a new car can be an unpleasant experience. Much of the discomfort stems from an aversion to price haggling, aggressive sales pitches, confusing payment plans — and that uneasy feeling that the dealer knows something you don’t. Then there’s the hassle of traipsing from dealer to dealer.

There are alternative ways to purchase the family car — or would be, if robust competition were finally allowed into the market. Car manufacturers and huge virtual used car lots are interested in offering sales over the Internet, which may include no-haggle pricing and save a lot of legwork. But dealership associations in Texas, Florida, Wisconsin, Nebraska, Louisiana, Kentucky, Virginia, Arizona, South Carolina and Utah are urging legislators and regulators to pass new laws or reinterpret old ones to prohibit anyone but traditional local dealerships from selling cars online.

In 40 states car manufacturers may not bypass the middleman to sell cars directly to the public. These laws may be interpreted to prevent manufacturers from selling cars online, even in cooperation with local dealers. In Texas, for example, state regulators ruled that, because Ford’s used-car Web site included price, Ford was illegally engaged in the direct sale of cars. The state threatened Texas dealerships that had participated in Ford’s program with a $10,000-per-day fine. Ford shut down the service for Houston and has challenged the ruling.

So why do such regulations exist? Proponents argue that franchise laws are necessary to prevent dealers from swindling consumers and to protect dealers from heavy-handed manufacturers.

Car dealers say that they, not the remote manufacturer or a Web site, give the consumer a helpful, long-term relationship, complete with guaranteed clean titles, honest car histories, and expert paperwork and tax processing. The dealer’s ability to offer customers a local relationship is indeed one of its strongest selling points and may be part of the reason why sales are slow on many Web sites. But entrepreneurs should not be prevented from offering alternatives, and consumers should not be prevented by law from seeking them out. In practice, franchise laws are just another way of denying consumers choice.

Dealers should realize that protecting consumers means allowing the forces of competition to bring their industry to a new stage of innovation that improves consumers’ buying experience. Competition from Internet companies will force lagging dealerships to offer even better local service, leading to an improved reputation for dealers as a whole. Government protection for dealers will only make consumers resentful, especially younger ones, who have become increasingly used to shopping for everything online.

Proponents also argue that restrictive franchise laws are necessary to protect dealers. But businesses do not have a “right” to remain in business, especially when the market changes to give buyers a more efficient option. It is not written in the sky that one may buy bread only from a baker, or a house from a builder, or a car from a local middleman-dealer. Car dealerships do not own consumers. Those consumers should have a right to buy elsewhere if they choose.

Regardless, the danger to dealerships posed by the Internet is speculative. Ford’s Web site program had many willing dealer-participants who benefited from the arrangement. Car dealerships, spurred by competition, should find their own ways to thrive in the Internet age. The Internet offers innovative dealers amazing opportunities to cooperate with online sales sites in obtaining referrals to local buyers; most buyers still want a test drive before they buy.

In the meantime, consumers should remember that what stands between them and a pleasant buying experience is not always car salesmen — sometimes, it’s legislators.

Solveig Singleton is director of information studies at the Cato Institute.