Sometimes Businesses Prefer Regulation over Competition

It is sad to report that all of my business friends love competition as an ideal, but in practice many of them make every effort to keep it away from their own segments of the marketplace. A cogent example is the efforts of automobile dealers around the nation to push for state laws making it illegal for people to buy automobiles directly over the Internet.

Even if the consumer orders a new motor vehicle over the Internet, in at least 44 states the sale itself has to go through an authorized dealer. This procedure prevents direct manufacturer-to-consumer sales and ensures the dealer does not lose its "middleman" fee.

Some state legislators who have passed these restrictive laws cite the safety issues involved with autos, and the fact that vehicles are much more expensive than the kinds of products usually ordered online. Those factors, apparently, are adequate justification for "protecting" automobile purchasers from the low prices they could obtain by eliminating the middleman.

It is a very twisted form of logic that enables state legislators to contend they are helping the consumer by keeping the price of a major product artificially high.

Higher Costs, Lost Benefits

It is estimated that the average motorist could save $1,000 or more per vehicle if manufacturer-to-consumer sales were permitted over the Internet. Internet sales would benefit the consumer in other ways: for example, by reducing the time-consuming process of having to visit a variety of automobile dealers in order to find the preferred combination of price, color, "extras," etc.

Some of the prohibitions enacted by individual states are extremely rigid. Because of a new law passed in Arizona this spring, manufacturers who wish to sell there may not even participate with their dealers in establishing Web sites that enable vehicle buyers to obtain financing and other after-sales services such as insurance and extended service plans.

Moreover, under the Arizona statute, if a potential customer approaches a manufacturer directly, the company must provide the name to every dealer in the entire metropolitan area. That onerous amount of paperwork pushes auto producers to make sure buyers do not even approach them.

The ultimate cost to the American consumer of the prohibition on Internet sales may be far greater than $1,000 added to each vehicle purchase. The success on the part of automobile dealers in obtaining state restrictions on competition is an early warning to manufacturers in other industries who are thinking about using the Internet to sell directly to the consumer.

There is a special aspect of the automobile industry, however, that is not universal among consumer products. Each automobile dealer has invested a substantial amount of money in obtaining and developing the franchise it holds to sell the products of a specific manufacturer. Correctly or not, the dealers may believe they entered into an implicit understanding that the manufacturer would not compete against them.

But if that were their concern--essentially a breach-of-contract complaint--the dealers could have taken the issue to court. There would have been little need for new state restrictions on automobile sales.

In the end, this issue is not about manufacturers and dealers: It's about consumers. When state legislators had to choose between supporting an organized business group or truly protecting the rights of consumers to make up their own minds, their choice was clear. In at least 44 cases, the politicians opted for the special interest group.

The efforts of the car dealers--and others--to insulate themselves from competition may ultimately fail on legal grounds. If the federal courts determine that the state restrictions impinge on interstate commerce, those laws could be held to be in violation of the Commerce Clause, that part of the U.S. Constitution that gives Congress the power "to regulate Commerce with foreign Nations and among the several States."

I expect to buy my next car through the conventional channel of an authorized dealer. But the economic notion of consumer sovereignty and the legal protections of the Constitution say it should be my choice. Car dealers--and other businesses--should be encouraged to respond to new technology in the marketplace--not by using the political process to achieve a government protected monopoly, but by making their services more attractive and efficient.

Murray Weidenbaum is chairman of the Center for the Study of American Business.

For more information ...

Will the Net Turn Car Dealers into Dinosaurs? Solveig Singleton addresses online auto sales in more detail. (Cato Institute, July 2000, 11pp.)

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