Dealer protectionism in New Jersey

Dan Crane —  13 March 2014

Last summer I blogged here at TOTM about the protectionist statutes designed to preempt direct distribution of Tesla cars that are proliferating around the country. This week, New Jersey’s Motor Vehicle Commission voted to add New Jersey to the list of states bowing to the politically powerful car dealers’ lobby.

Yesterday, I was on Bloomberg’s Market Makers show with Jim Appleton, the president of the New Jersey Coalition of Automotive Retailers. (The clip is here). Mr. Appleton advanced several “very interesting” arguments against direct distribution of cars, including that we already regulate everything else from securities sales to dogs and cats, so why not regulate car sales as well. The more we regulate, the more we should regulate. Good point. I’m stumped. But moving on, Mr. Appleton also argued that this particular regulation is necessary for actual reasons, and he gave two.

First, he argued that Tesla has a monopoly and that the direct distribution prohibition would create price competition. But, of course, Tesla does not have anything like a monopoly. A point that Mr. Appleton repeated three times over the course of our five minutes yesterday was that Tesla’s market share in New Jersey is 0.1%. Sorry, not a monopoly.

Mr. Appleton then insisted that the relevant “monopoly” is over the Tesla brand. This argument misunderstands basic economics. Every seller has a “monopoly” in its own brand to the same extent as Mr. Appleton has a “monopoly” in the tie he wore yesterday. No one but Tesla controls the Tesla brand, and no one but Mr. Appleton controls his tie. But, as economists have understood for a very long time, it would be absurd to equate monopoly power in an economic sense with the exclusive legal right to control something. Otherwise, every man, woman, child, dog, and cat is a monopolist over a whole bunch of things. The word monopoly can only make sense as capturing the absence of rivalry between sellers of different brands. A seller can have monopoly power in its brand, but only if there are not other brands that are reasonable substitutes. And, of course, there are many reasonable substitutes for Teslas.

Nor will forcing Tesla to sell through dealers create “price competition” for Teslas to the benefit of consumers. As I explained in my post last summer, Tesla maximizes its profits by minimizing its cost of distribution. If dealers can perform that function more efficiently than Tesla, Tesla has every incentive to distribute through dealers. The one thing Tesla cannot do is increase its profits by charging more for the retail distribution function than dealers would charge. Whatever the explanation for Tesla’s decision to distribute directly may be, it has nothing to do with charging consumers a monopoly price for the distribution of Teslas.

Mr. Appleton’s second argument was that the dealer protection laws are necessary for consumer safety. He then pointed to the news that GM might have prevented accidents taking 12 lives if it had recalled some of its vehicles earlier than it eventually did. But of course all of this occurred while GM was distributing through franchised dealers. To take Mr. Appleton’s logic, I should have been arguing that distribution through franchised dealers kills people.

Mr. Appleton then offered a concrete argument on car safety. He said that, to manufacturers, product recalls are a cost whereas, to dealers, they are an opportunity to earn income. But that argument is also facially absurd. Dealers don’t make the decision to issue safety recalls. Those decisions come from the manufacturer and the National Highway Traffic Safety Administration. Dealers benefit only incidentally.

The direct distribution laws have nothing to do with enhancing price competition or car safety. They are protectionism for dealers, pure and simple. At a time when Chris Christie is trying to regain credibility with New Jersey voters in general, and New Jersey motorists in particular, this development is a real shame.

14 responses to Dealer protectionism in New Jersey

  1. 

    Dan, do you think Tesla has any legal basis for bringing suit to challenge these state laws and rules?

    • 

      I don’t know about state law challenges, but any federal challenge would face difficulties. Antitrust claims would likely be preempted under the Parker v. Brown doctrine. Constitutional claims might be available on negative commerce clause or equal protection grounds, although those would be hard. There’s an encouraging recent Fifth Circuit decision holding that pure protectionism of special interests does not count as a legitimate state purpose under rational basis review, so maybe there’s some hope.

      • 

        I’ve been thinking a lot about this today. Have you taken a look at Alliance of Automobile Manufacturers v. Hull, 137 F.Supp.2d 1165 (D. Ariz. 2001), and Ford Motor Company v. Texas Department of Transportation, 264 F.3d 493 (5th Cir. 2001) (both of which rely primarily on Exxon Corp. v. Maryland, 43 U.S. 117 (1978))? They seem like major roadblocks to any federal Dormant Commerce Clause/Equal Protection challenge that Tesla may wish to wage. I’ve been trying to think of a way that Tesla might be able to set itself outside of the framework established by these cases, but am having trouble mustering any really compelling arguments. Exxon seems so wrongheaded, yet unfortunately so on-point.

  2. 

    Dan

    I think I would have argued that even if Tesla is a monopoly, these laws make zero sense – the only meaningful constraint on its pricing power is (or would be) competition from other manufacturers, not from dealers. Arguing about whether Tesla does or doesn’t have market power lets the auto dealers frame it as a purely empirical dispute about which reasonable people can disagree. As you did point out, Tesla (irrespective of the degree of its market power) wants to efficiently distribute its product, and public policy should let it determine what that distribution method should be.

    Keep up the good fight.

  3. 

    It’s my impression that these laws were originally enacted to protect dealers from termination or exploitation by manufacturers. Whatever the merits of those arguments, they have nothing to do with Tesla, since Tesla wants to bypass dealers altogether.

  4. 

    It’s my impression that these laws were initially passed to protect dealers from termination or undue pressure by manufacturers. The dealers argued that if the manufacturers had their own show rooms, they would undercut the dealers and destroy the dealers’ investment. That doesn’t make much sense to me, but, in any event, it has nothing to do with the Tesla question, since Tesla wants to bypass dealers altogether.

    • 

      Dan writes: ” That doesn’t make much sense to me, but, in any event, it has nothing to do with the Tesla question, since Tesla wants to bypass dealers altogether.”

      Ok, you appear to admit that you don’t understand the rationale or history of why this law got enacted.

      Do you think that history or rationale matters?

      • 

        Weakness itself is not a reason to protect something with laws. All else being equal, poorly run companies tend to be weaker than good companies, but obviously that’s not a reason to pass laws that protect them. Further, it’s painfully obvious from the massive lobbying by dealer organizations that they are not weak now.

        If you have a compelling argument to make in favor of dealerships, I’d love to hear it. Between this and his earlier essay, Dan Crane demolished all of the ones that have been advanced so far.

  5. 

    Ok.

    Have you any idea why these laws were enacted in the first place?

    When the auto dealers were fairly weak.

    • 

      Or in an alternate read, when the auto dealers would rather fold (reboot, reincorporate, whatever) than show in (District) Court. Not like today it marks the occasion as a Tuesday, but I think one Distributor of the time was convinced the language of the court was Aramaic. Now it can be in trade gibberish as long as the competitive contract readings please.

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