News Story

Want to Buy a Tesla in Michigan? Too Bad, You Can't

Protectionist law limits competitions, hurts consumers

If a Michigan citizen wants to buy an iPhone from Apple, they can go to an Apple store, buy one from another merchant, or order it online.

But if a state resident wants to buy a Tesla, too bad — they'll have to go to Ohio or another state to get one. That's because a law meant to protect new-car dealerships prohibits a manufacturer from directly selling a car to a consumer.

At a luncheon hosted in Lansing this week by the Mackinac Center for Public Policy, Dan Crane, an associate dean and law professor at the University of Michigan, explained to legislators and others in attendance how these laws came to be and why they no longer make sense.

Crane said direct distribution of automobiles — manufacturers selling directly to consumers — is allowed in about half of the states, mostly along the coasts (though also recently in Ohio). In the other half of the nation, automakers are required by state laws to sell their products through a dealer.

“That’s bad for consumers, that’s bad for choice, that’s bad for efficiency and innovation,” Crane said.

The laws came about in the 1930s and 1940s, putatively to protect small dealerships from losing business through actions taken by the Big 3 automakers. At the time, the Big 3 controlled almost the entire car market. They sold directly to consumers, in addition to selling through franchised dealers and through other stores.

In contrast, today there are 10 automakers selling at least 100,000 vehicles per month nationwide, and the competition is fierce.

Crane argued that the economics of distribution mean that sometimes direct selling makes sense while other times third-party dealerships or a combination is better.

Apple and cell phone companies are an example of dual distribution, where the product is sold online directly from the manufacturer as well as through third parties. Other companies, as Gateway computers did years ago, sell only directly to consumers.

Companies like Tesla and Elio want to sell directly to consumers here, but can’t. Crane said from a public policy standpoint, “There is no reason why the law should favor one type of distribution or another.”

He added, “This is not an anti-dealer or pro-Tesla argument. … The system works best when competition drives the distribution strategy.”

Defenders of the status quo use four main arguments against lifting the restrictions, and Crane offered rebuttals to each.

"Direct distribution gives manufacturers a monopoly over retail sales."

Crane said the reality is the opposite; the model allows greater competition and lowers prices for consumers. He cited a 2009 Justice Department study that found direct distribution saves auto buyers some $2,200 per vehicle on average.

"Vehicle manufacturers won’t provide adequate levels of after-market services. So for example, a buyer who ended up with a lemon would have nowhere to go for repairs."

Crane said there is no evidence this happens in the states that allow direct sales. Manufacturers know their brand would collapse if this happened. Moreover, Michigan’s current system actually causes this problem right now, because Tesla wants to invest in service centers here but is prohibited from doing so.

"Fewer restrictions would lead to unsafe cars on the road."

Crane noted that current safety and quality issues at General Motors and Volkswagen are happening despite the franchise model. In any case, dealers don’t make recall decisions; federal regulators do.

"Direct sales is bad for local economies and small businesses."

This is the most frequent claim, and Crane cited studies that show direct distribution creates more local jobs, not fewer. Tesla and Elio want to invest in Michigan, build service centers and hire workers – but they cannot.

“If anything, this model is sending jobs to the Buckeye State,” Crane added. "This is not a story of big business versus small business; it is big business versus consumers."

He also observed that this isn’t a liberal or conservative issue. There is a broad coalition supporting reform that includes free-market supporters, environmentalists, and many in between.

"From the Sierra Club to the Koch Brothers," Crane noted.

He said that independent studies on this issue all conclude that more market freedom leads to better outcomes for consumers. That view is supported by a letter sent by the Federal Trade Commission last May to Michigan Sen. Darwin Booher. It said, “In our view, current provisions operate as a special protection for dealers — a protection that is likely harming both competition and consumers.”

Crane concluded that while regulatory policy is complicated and controversial, “On this issue, I do not know a single economist across the political spectrum, a single law professor across the political spectrum, who believes these laws are good for consumers or the economy.”


A video replay of the event:

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.