My wife and I both drive cars that are getting on in years: a 1992 Honda Accord inherited from her parents and a 1989 Ford Crown Victoria inherited from mine. Lately, it seems that one or the other is in the shop most of the time, so we’ve started talking about buying a new car.
Since this is something neither of us has ever done, the thought is a bit daunting. A car is a big investment, there’s a bewildering variety of models to choose from, and the fear of being ripped off casts a pall over the whole enterprise.
As it happens, I’ve also been reading up on state laws governing car dealers. Far from reassuring me, this research has made me worry even more that I’ll get a raw deal.
Almost every state strictly controls the number and location of businesses that sell new cars. Although these restrictions are supposedly intended to protect consumers, they actually serve the interests of existing dealers by helping them exclude competitors.
A 1986 study by the Federal Trade Commission found that, as you might expect, consumers pay higher prices as a result of these limits on competition. A more recent study, by Hillsdale College economist Gary Wolfram and former Michigan state representative H. Lynn Jondahl, put the cost at $830 million a year in Michigan alone.
Instead of repealing these protectionist regulations, legislators in several states are considering laws that are even more onerous. Leading the way is Arizona, which last April adopted a law that, among other things, prohibits manufacturers from selling cars directly to consumers, advertising actual prices (as opposed to the "manufacturer’s suggested retail price"), and selling parts, accessories, or services online.
To give you a sense of how much pull Arizona’s car dealers have, only five out of 90 legislators voted against the bill. One of them was House Majority Leader Lori Daniels, who quaintly told the Arizona Business Gazette, "I think the marketplace works best left alone."
Last month the Alliance of Automobile Manufacturers, which represents 13 car companies, filed a federal lawsuit seeking to overturn Arizona’s law, which it fears could be imitated by other states. The grounds for challenging the law, enforcement of which has been put on hold pending resolution of the case, include the First Amendment and the Commerce Clause.
During the last decade, the Supreme Court has been increasingly skeptical of attempts to restrict truthful commercial speech. In a 1996 decision, for example, it overturned Rhode Island’s ban on the advertisement of liquor prices, rejecting the state’s rationale that it was trying to protect "public health" by discouraging drinking.
Arizona’s consumer protection rationale is similarly thin, which also makes the law vulnerable to a Commerce Clause challenge. The Constitution prohibits states from interfering with interstate commerce, except incidentally while exercising their legitimate police powers, precisely to avoid the sort of trade barriers that car dealers in Arizona and elsewhere are demanding.
The new legislation was prompted largely by the threat of online car retailing, which currently represents only a small percentage of total sales but seems bound to grow if the regulatory obstacles can be overcome. As in the case of interstate wine sales, the Internet is making it harder to enforce and justify laws aimed at shielding local businesses from competition.
For the time being, automakers say they do not plan to sell cars directly to the public, which is illegal in about 40 states and would antagonize the dealers on whom they depend for most of their sales. But in the July issue of Reason magazine, Diane Katz and Henry Payne predict that customers soon will be able to buy cars the way they buy computers from Dell or Gateway: made to order, direct from the manufacturer, via the Internet.
That option will bring prices down, especially if manufacturers do eventually cut dealers out of the picture. And it will allow buyers to get exactly what they want, delivered to their homes (or a local dealer) within days.
Katz and Payne quote Mark Hogan, president of G.M.’s Internet Commerce Division: "The efficiency of the Internet is driving people to behave differently as consumers. The customer will ultimately decide, and we have to be prepared to adapt to meet what the new model ends up being."
Imagine that: One day, the customer will decide. I hope our cars hold out long enough.