Rather than selling cars through independent dealers, the upstart electric car maker Tesla sells its automobiles directly to consumers. However, many states prohibit direct auto sales, thanks to laws from the mid-20th century that ostensibly were intended to protect dealers from automakers’ market power. The need for that protection was questionable when the laws and regulations were adopted and are even more dubious in today’s highly competitive auto market. But they are especially inappropriate when applied to a small new automaker that solely wants to engage in direct sales.
This week, the Georgia Automobile Dealers Association filed a petition with the state’s Department of Revenue in an attempt to bar further sales of Tesla sedans. Such battles have erupted in numerous states, from Missouri to New Jersey. In the latest issue of Regulation, University of Michigan Law professor Daniel Crane argues that dealer distribution restrictions are based on faulty ideas of consumer protection. Traditional dealers claim that competition among a brand’s dealers prevents the manufacturer from “gouging” consumers and extracting monopoly profits. Crane argues that standard economic theory demonstrates that these claims are nonsense. Firms with market power will be able to claim monopoly profits, regardless of whether middlemen, such as dealerships, are involved.
Moreover, by restricting competition among business models for auto sales, laws such as those in Georgia stifle competition among automakers. When companies such as Tesla seek to lower costs through innovative business designs, they face costly regulatory hurdles and legal challenges such as the sales ban in Georgia. These laws protect existing dealers and hurt consumers.