Road to Ruin: Tesla vs. Auto Dealers

Tesla Motors, the famed electric vehicle startup from billionaire Elon Musk, is feeling the full brunt of auto dealers associations wielding antiquated regulations. On March 11th, the state of New Jersey, facing complaints from the New Jersey Auto Dealers Association, banned Tesla from selling its electric cars directly over the internet from the factory to consumers.

Consumers want to customize and order Tesla cars direct from the factory online, but many states continue to ban the direct sale of cars from the manufacturer to the consumer. There are dozens of highly competitive car manufacturers in the United States, so why have state and federal governments propped up this business model? It has all been done in the name of protecting the consumer.

Often when consumers feel that companies are overcharging for their product, they demand action from the government in the form of competitive regulation. Governments must do something to stop the monopoly or oligopoly to protect consumers from usurious prices. Utilities are the most commonly used example. Electricity and water distribution are natural monopolies: industries with vast economies of scale that if left unregulated would lead to a single dominant firm. Governments must regulate these industries to protect consumers from extortionate pricing. But, in many cases regulations become tools of companies to protect their own profits often at the expense of the consumer.

Early in the 20th century the nascent automobile industry consisted of only a few firms, all of whom wanted to expand rapidly. In the 1930s states regulated the disintegration of car retailing and manufacturing to create a competitive retail industry that would prevent oligopoly pricing and stop manufacturers from undercutting independent franchisees. The National Auto Dealers Association (NADA) still uses this argument today, saying “[i]f Ford sold cars in its own stores, what incentive is there to sell a Focus for less than Ford’s suggested retail price?”. The answer is obvious to Tesla and other manufacturers: a consumer can buy a comparable model from dozens other manufacturers available in the United States. There is no need for regulating car retailing now that the industry has so much more competition, particularly from the dozens of international manufacturers.

In a Department of Justice competitive advocacy paper, Gerald Bodisch wrote that the current regulatory model raises car prices over $2,000. Worse yet, consumers revile the car buying experience so much that they would prefer to avoid auto dealers entirely even if it saved them nothing.

The successful political maneuvering of auto dealers associations to prop up old, unnecessary regulations in New Jersey and elsewhere is hurting consumers and slowing the diffusion of new vehicle technology. The federal and state governments must act to modernize or eliminate the anachronistic rules and support the interests of car buyers instead of the bottom line of salesmen.

P.S.

For a bit of more reading on the economic cost of auto dealers, read Economic Effects of State Bans on Direct Sales to Car Buyers.

Updated for style April 3rd, 2014