by Lynne Kiesling
The Tesla Model S: Bypassing dealer franchises. For now.
Tesla Motors (NASD:TSLA) is doing more than shaking up the automobile industry by producing an exciting high-end electric vehicle and establishing a network of battery-swapping stations. Tesla wants to sell directly to consumers, bypassing established dealer franchising that dominates the industry. But such dealer franchising has not been a mere transaction-cost-driven Coasian outcome it’s undergirded by state laws that require manufacturers to sell their automobiles through independent dealers (Francine Lafontaine and Fiona Scott Morton, Journal of Economic Perspectives Summer 2010 (pdf) provides a useful overview of the history of such laws).
Existing dealers object to Tesla’s direct-to-market approach, and are using the dealer franchise laws to stop Tesla from doing so in states like Virginia; see also this Reason post on legislative events in New York. Note that Virginia law prohibits manufacturers from owning dealerships, outlawing vertical integration in the name of promoting competition, which means that a potential competitor can’t use vertical integration as a competitive strategy (yeah, that’ll promote competition …). Think about that restriction, and apply it to another innovative company: Apple. Dealer franchise laws in electronics would prohibit Apple (and Samsung, etc.) from operating its own stores. How would such a law affect competition in electronics? The answer is not clear, which is the point; vertical integration is not inherently anti-competitive at the retail level. In many ways, these laws are a relic, a holdover from a century ago when the economics of vertical integration was not well understood and vertically integrated firms with market power were per se suspect.
Dan Crane has a really nice post at Truth on the Market about the state dealer franchise laws that examines all of the arguments in favor of state dealer franchise laws. After countering them all and finding them wanting, Crane concludes that
Since the arguments for dealer laws are so weak, I’m left with the firm impression that this is just special interest rent-seeking of the worst kind. It’s a real shame that Teslaseemingly one of the most innovative, successful, and environmentally correct American industrial firms of the last decadeis going to have to spend tens of millions of dollars and may eventually have to cut shady political deals for the right to sell its own products.
This raises an interesting political economy situation. When innovative and environmentally correct meets the crony corporatism of existing legislation, is the entrenched incumbent dealer industry sufficiently politically powerful to succeed in retaining their enabling legislation that raises their new rival’s costs?
Lynne Kiesling is a Distinguished Senior Lecturer in the Department of Economics at Northwestern University. Her economic specialty is industrial organization, regulatory policy and market design in the electricity industry. In particular, she examines the interaction of market design and innovation in the development of retail markets, products and services and the economics of “smart grid” technologies. She also teaches undergraduate courses in principles of economics, energy economics, environmental economics, and history of economic thought, and she writes about economics as the editor/owner at the website Knowledge Problem, where this post first appeared.