By Dan Crane, Detroit Free Press, October 14, 2016
Michigan remains one of the shrinking number of states to prohibit a car manufacturer like Tesla Motors from opening its own showrooms and service centers and dealing directly with customers. Instead, Michigan requires car manufacturers to use franchised dealers for all customer transactions. Most other states have recognized that allowing consumers to choose between franchised dealerships and company stores is good for competition, innovation and consumer choice.
Two weeks ago, after years of failed efforts to get the Michigan Legislature to update its car laws for the 21st Century, Tesla filed a lawsuit in Grand Rapids challenging the constitutionality of Michigan’s direct distribution prohibition. As the suit progresses, it will be interesting to see how the governor and attorney general try to defend Michigan’s outdated and anti-consumer law.
When the Michigan statute was originally passed in the late 1970s, it was designed to prevent the Detroit Three car manufacturers from taking unfair advantage of their franchised dealers. In other words, it was solely a dealer protection statute.
But the dealers have now understood that they can’t continue to justify the direct sales and service prohibition in dealer protection terms. Not only has the market fundamentally changed (most dealers are no longer “moms and pops” but rather multi-million or billion-dollar organizations), but the dealer protection rationale has nothing to do with companies like Tesla and Elio Motors that don’t want to use dealers at all.
Instead of recognizing that these restrictions are based on antiquated dealer protection ideas, the dealers have been trying to justify them on consumer protection grounds. The dealers have argued that allowing a company to open its own showrooms and service centers would raise prices consumers pay for sales and service.
This argument has no merit whatsoever. The unanimous view among credible economists is that direct distribution restrictions harm consumer welfare and, if anything, raise prices to consumers. Tellingly, the dealers’ position has no support from a single pro-consumer organization. The U.S. Federal Trade Commission, the federal agency that looks out for consumers’ rights, has described Michigan’s law as anti-consumer dealer protectionism. So have the Consumer Federation of America, Consumer Action, and Consumers for Auto Reliability and Safety. If the dealers’ consumer protection arguments have any merit, why are all of the organizations that look out for consumers’ interests saying just the opposite? Would you rather believe the car dealers or the Consumer Federation of America and Federal Trade Commission?
And it’s not just consumer advocates that have argued against Michigan’s law. A broad coalition of environmentalist, free market, pro-consumer, pro-competition, and pro-innovation groups, including strange bedfellows like the Sierra Club and the Koch Brothers’ Americans for Prosperity, has come out against restrictions on direct distribution. Not a single public interest organization unaffiliated with the car dealers has supported the dealers’ position.
The direct distribution prohibition doesn’t just interfere with consumer choice and raise car prices. In the longer run, it also impedes innovation. Over the past several years, I have spoken with many companies that would like to sell new kinds of cars in the U.S. market but believe that franchising dealers will bog them down and prevent their cars from reaching consumers. As the car market shifts in new directions, such as toward alternative fuel sources and vehicle automation, new forms of distribution will be required as well. Innovating in product markets often requires innovating in distribution methods. Michigan’s law is trying to freeze the vehicle distribution system as it stood fifty years ago. It might as well mandate the horse and buggy.
Gov. Rick Snyder has repeatedly called for Michigan to become more innovative. Two years ago, the Information Technology & Innovation Foundation gave Michigan its dreaded “Luddite Award” for doubling down on blocking Tesla from entering the state — not exactly consistent with the governor’s vision. We can do better.
Dan Crane is a professor at the University of Michigan Law School with a focus on antitrust and regulation.