Monday Morning RAGE

Car dealership franchise laws are bad

There’s no optimism this morning, just rage, inspired broadly by laws that ban consumers from buying cars directly from auto manufacturers and specifically by Florida H.B. 637, signed into law by Ron DeSantis last week.

[Note that all fifty states have some form of these franchise laws—we’re not singling out RDS or one political party, though some aspects of the new Florida law are particularly bad.]

Imagine if this kind of franchise law existed for computers. You need a new laptop so you go online, read a few reviews, browse a couple manufacturer websites, and decide that a new MacBook Air is right for you. So far, so good.

But then, instead of ordering it online or going to the local Mac Store, which has been explicitly banned by state law, you head over to Basu Apple, your local Apple franchisee. A commissioned salesperson helps you out, not that you need any help—you know the exact MacBook you want. The price at Basu Apple is higher than what you saw online, so you haggle for a while but still end up paying a 5-10% premium on the laptop.

That’s if you’re lucky. If Basu Apple doesn’t have the model you want, you can wait for them to get it or you can find another nearby dealer, but nearby might be a stretch because of something called a Relevant Market Area, a carve out in the law that provides a dealer with exclusive territorial rights in a specific area.

[Maryland doesn’t specify RMAs, so pretend Basu Apple is somewhere else.]

Once you’ve finally tracked down the MacBook of your dreams, you decide you want a MacBook case from Apple. Head back to their website, find the case you want, go to order it, and…you can’t. Apple provides a suggested retail price and a nice little tool that helps you search for a local dealer that can sell you the case, because obviously it’s illegal to order an official Apple accessory directly from the source.

Basu Apple uses the profits from your MacBook purchase to lobby lawmakers to keep these laws in place, and because there’s a computer dealership in every congressional district in America, these lobbying efforts are incredibly effective.

Back to reality, where laptops, but not cars, can be purchased directly from the manufacturer. This new Florida law, which was partially written and fully supported by the special interest group called the Florida Automobile Dealers Association, has got it all: it bans manufacturers from selling straight to consumers, requires that dealers be cut in on post-purchase upgrades (even if it’s just an over-air software purchase), and prevents manufacturers from limiting dealership markups.

We know what you’re thinking: how could RDS do this to Elon Musk and Tesla (which doesn’t have franchise dealerships) after Elon so generously let him announce his presidential campaign on Twitter? No need to worry. The new law allows Tesla and any other new car company to sell directly to consumers. Only legacy automakers that currently have dealerships in the state have to use a third party franchise to sell you a car.

Proponents of these laws, and by “proponents” we mean “car dealerships,” claim they protect consumers. Straight from the FADA lobbyist: “The attempt by auto manufacturers to cut out the dealer would only result in higher prices and less customer service to the public.”

This is obviously nonsense. Adding a middleman doesn’t reduce costs. Maybe there was a case for franchise laws back before the internet, when a lack of dealerships might have prevented consumers from knowing what they were buying. Maybe, but probably not.  

This is how crony capitalism works. Special interest groups lobby for restrictions on free commerce. This hurts consumers in the form of higher prices. Those higher prices enrich the special interest group. That gives the special interest group more money to lobby for more restrictions.

We’re not singling out car dealerships here. Well, maybe we are, but they’re hardly the only offenders. Physicians convinced congress of an impending doctor glut in the 1980s, leading to a moratorium on new medical schools and other supply restrictions that have led to doctor shortages and higher health care prices. Dentists have lobbied against laws that would let hygienists work without them in poorer rural areas.¹ Beverage wholesalers favor distribution laws that put smaller brewers at a huge disadvantage.

These examples are just the tip of the crony iceberg.

What should you take from this? Protectionism hurts consumers, but there’s not much you can do about it. These policies exist because they create concentrated benefits for the special interest group and diffuse costs for consumers. There’s a reason you’ve never met a single-issue voter dedicated to eliminating automobile franchise laws.

Next week, we’ll get back to our normal Monday Morning Optimism thing. For now, RAGE.

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1. In case you think we’re only singling out industries that don’t impact us, Zack is married to a dentist.