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How car dealers' war on Tesla harms consumers

A Tesla showroom in Palo Alto, CA.
A Tesla showroom in Palo Alto, CA.
Justin Sullivan/Getty

A number of states have laws prohibiting car manufacturers from selling cars directly to consumers. They require, instead, that they purchase new cars from dealerships. Tesla has been seeking permission to sell its innovative electric cars directly to consumers across the country. But the company experienced a setback on Tuesday, as Michigan governor Rick Snyder signed legislation strengthening the state's ban on direct car sales.

It's hard to see how these laws could be anything but bad news for Michigan consumers. Like any middleman, dealers drive up the cost of cars, and these laws prevent Tesla from developing more convenient ways to deliver cars to consumers. Tellingly, in his post explaining his support for the legislation, Snyder doesn't actually make the case in favor of the ban. He just points out that direct sales were already illegal and the new legislation just makes modest changes to the existing rules.

The main supporters of these laws are auto dealerships themselves. According to the Wall Street Journal, "dealers say laws passed over the decades to prevent car makers from selling directly to consumers are justified because without them auto makers could use their economic clout to sell vehicles for less than their independent franchisees." This argument doesn't make much sense. Lower prices might be bad news for independent franchisees, but they're a good thing from the consumer's perspective.

But despite their weak policy arguments, auto dealerships have a lot of clout with state legislators. People who own auto dealerships tend to be pretty affluent, so they can afford to make generous campaign contributions. And dealerships are spread out around a state, allowing dealers' groups to organize a potent state-wide lobbying campaign. The result: the Michigan legislature overwhelmingly approved the protectionist legislation.

As economists at the Federal Trade Commission have written, the ban on direct auto sales is "an anomaly in the broader economy, where most manufacturers compete to respond to consumer needs by choosing from among direct sales to consumers, reliance on independent dealers, or some combination of the two." But auto dealerships are using their clout to force consumers in Michigan and other states to pay inflated prices to get cars through them.

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