Legalize Direct Sales of Electric Vehicles to Consumers!

I am a signatory to an open letter from economists, lawyers and others with expertise in market regulation advocating that states stop preventing auto manufacturers most notably manufactures of electronic vehicles such as Tesla from selling direct to the public:

…A brief review of the history of dealer franchise laws may help explain how we got to where we are today. In the mid-twentieth century, car dealers were mostly “mom and pop” sole proprietorships. By contrast, the “Big Three” auto companies were hegemonic firms that faced relatively little domestic or foreign competition. The dealers began to complain to state legislatures that the car companies were taking advantage of them in a variety of ways. This led almost all of the states to pass dealer franchise laws intended to protect the dealers. Among other things, these laws prohibited a manufacturer from opening its own showrooms or service centers and transacting directly with customers. The dealers successfully argued that if the manufacturers were allowed to distribute directly to consumers, they could unfairly undermine their own franchised dealers.

Fast-forward to 2021. The situation is very different. First, the dealership system has grown from its “mom and pop” roots to one where enormous companies operate large dealer networks. The top 10 dealership groups alone earn over $97 billion in annual revenue. Second, the car manufacturer market has become far more competitive. Today, there are at least 15-20 major manufacturer groups selling cars in the U.S. This gives dealers more choices, and hence more leverage in contractual negotiations with manufacturers. Third, and perhaps most importantly, technological and market changes have led new entrants into the market—particularly companies selling EVs—to choose to distribute directly to consumers and not to use franchised dealers at all. As the Massachusetts Supreme Court has recognized, the original concerns that animated the direct distribution prohibitions—protecting a franchisee from its own franchisor—do not apply to a company that is not using franchisees.

Here is a key reason why the dealers don’t want direct sales:

4) Different profit models: Traditional dealerships earn low profit margins on new car sales, and make it up on service. EVs have a much smaller service component since they don’t have service needs like oil changes or engine tune-ups. Traditional dealerships therefore lack much of an incentive to sell EVs.
5) Conflict of interest. EV sales cannibalize internal combustion sales, which are the dealers’ lifeblood. Dealers therefore lack the motivation to sell EVs.

…There is no credible consumer protection argument in favor of prohibiting direct distribution. Consumers should be given the choice of how they buy their cars.

See the letter for more. I wrote about this issue earlier in Tesla versus the Rent Seekers.


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