August 1, 2006

The Car Dealer-State Government Racket

Why do cars cost so much?

Max Borders at TCS Daily says that a big part of the answer is an outmoded distribution network protected by state franchising laws. He is correct:

What if I said you could save $1000-$2500 the next time you buy a car? What if I told you that you didn’t have to haggle with a lot lizard in the process? In fact, you could use the Internet to shop around for a new car instead of driving from dealership to dealership, and then buy at your leisure.

Well, you can’t. Know why?

What stands between you and these benefits is your state government. According to a panel recently hosted by the Mercatus Center in Arlington, Virginia, the primary reason for these regulations is collusion between “licensed” car dealers and state legislatures who mandate dealer licenses. Such is the case in all fifty states. Legal and economic scholars are trying to figure out how this happened and how to change it, for the sake of both economic freedom and benefit to customers.

Regulatory barriers to buying a car online are a textbook example of “rent-seeking” — when an interest group hollers, stomps and lobbies the state until politicians cave. Car companies that might offer cars at a lower price — with a better shopping experience — are blocked from doing so.

….. What dealers know full well is that entrepreneurs will find all sorts of ways to make the services dealerships offer redundant — which will benefit you and me. Consider the question of how people will test drive cars in an Internet purchasing environment. We can imagine automakers offering smaller test-drive centers. And we can also imagine delivery and logistics networks for cars so that people can pick up their cars quickly once they buy them — or have them delivered to their driveways.

We just happen to be living in a time when major US auto manufacturers are hamstrung by cannibalistic unions, stiff competition, and federal regulators. Obstacles to direct-to-consumer sales represent another hard hit against an ailing industry. But even if the US auto industry was doing swimmingly, why should states get in between you and your new car to the tune of a couple of thousand dollars?

What Borders did not mention is that the current situation hurts the longtime players in the car business more than it does the more recent arrivals. The longtimers built up dealer networks that are probably 3-4 times as large as they currently need to be, while the newer arrivals have been able to achieve the market penetration they’ve looked for with fewer locations. An example: The Greater Cincinnati Automobile Dealers Association membership directory (link is to first page of directory, which goes on for 4 pages) lists 14 Chevrolet dealers and 12 Ford dealers — but only 4 for Toyotas, 3 for Hondas, and 3 for Nissans. Does anyone believe that these three relative newcomers have hurt themselves by having so many fewer locations?

Auto dealerships and the state franchising laws that protect them are Model T relics of a different world that pass on billions of dollars of unneeded costs to cay buyers every year.

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