Spiwak: The curious case of Tesla’s lawsuit

Lawrence Spiwak

Every state in America has laws governing the retail sales of new automobiles. Some states — including Michigan — preclude auto manufacturers from selling cars directly to consumers, which means that when you buy a new car, you buy it from an independently-owned, franchised dealer.

Last September, Tesla Motors sued the governor, attorney general and secretary of state, claiming that Michigan’s prohibition against direct manufacturer sales is unconstitutional because it lacks a rational means of achieving any legitimate government purpose.

Unfortunately for Tesla, it faces an uphill legal battle. Over the years this argument has often come before the courts, and each time the constitutionality of such laws has been upheld.

But Tesla’s complaint begs an interesting policy question: do auto-franchise laws continue serve the public welfare in the 21st century, or do such laws serve just the private interest of dealers and existing manufacturers as Tesla alleges? If we look at the data — specifically, vehicle pricing — a strong argument can be made that state auto-franchise laws continue to promote the public interest by increasing competition and, by extension, lower prices for consumers.

Two types of competition exist in auto retail: inter-brand competition between automakers and intra-brand competition between dealerships. Once a consumer decides on what make and model she wants (i.e., inter-brand competition), she then aggressively shops for the best price from a variety of same-brand dealers (i.e., intra-brand competition). In Metro Detroit, a consumer can shop at 12 Toyota dealers to buy a Camry.

And a statistical analysis of automobile prices released last year showed that consumers benefit greatly from intra-brand competition for new cars. Analyzing data on hundreds of thousands of new car sales and registrations in Texas for 10 of the most popular models, the study found that when multiple dealers within a brand compete for business, prices drop. I doubt many car buyers who shop around are surprised by the result.

In contrast, a direct sales model — by definition — eliminates the possibility for intra-brand competition. As Tesla concedes in its complaint, “Tesla sells its cars at uniform and transparent list prices … Tesla customers pay the same price whether they purchase through Tesla’s website, at a local store, or at a store in a different state.” In fact, Tesla President Elon Musk tweeted that Tesla would offer “no discounts ever” to consumers in their showroom — stressing that this pricing strategy is “fundamental” to the brand’s integrity.

So what do consumers get from Michigan’s current auto franchise law?

Another recent study predicts that direct automobile selling could lead to higher prices for consumers and higher profits for manufacturers. In contrast, the franchise model produces lower prices, with new cars being sold at tiny, if any, profit margins. Since cars are very expensive, it makes sense for the Michigan legislature to require new cars be sold through independent dealers if price competition is more intense for doing so.

It would appear, therefore, that state auto franchise laws do address supportable public policy considerations and do not exist (as Tesla argues) to promote the private interests of auto dealers. If independent dealers are replaced with direct sales, then Tesla (along with other auto manufacturers) will earn higher profits and the consumers will pay higher prices for new cars. Consumers will be greeted at the door for one of their most expensive purchases with Mr. Musk’s “no discount policy.”

Now whose private interest does that serve?

Lawrence Spiwak is president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies.