FTC staff bias on intra-brand car competition is a bad deal for consumers

Today, the Federal Trade Commission (FTC) will hold a public workshop to focus on state regulation of the U.S. auto industry. Among the topics to be discussed are the laws in some states that regulate the ability of auto manufacturers to own and operate physical sales locations within the state’s borders.

{mosads}Automotive franchise laws such as these have been a fundamental cornerstone of automobile retailing in America for decades, and so changing these laws would have wide implications on the modern auto market — perhaps benefitting some while harming others. Such tradeoffs deserve careful and dispassionate scrutiny from a neutral arbiter, but we won’t get that from the FTC: The agency’s staff has shown an overt and ideological hostility to these laws over the past several years.

For consumers, the biggest question is how changes to these laws will impact car pricing. We know, both intuitively and through data analysis, that competition between multiple same-brand dealers drives down car prices for consumers. Looking to buy a new Ford? You benefit when Smith Ford and Johnson Ford both want your business and you can go to both (or more) looking for a good deal. For the same car, almost all the competitive activity must turn to price.

The data backs this up. In March 2015, we published a study, “The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis,” where we used large samples of transactions for 10 of the most popular new cars purchased in the state of Texas for the years 2011, 2012 and 2013. With this unique data set, we were able to estimate the effects of same-brand dealer competition (or intra-brand competition) on car prices.

The evidence showed that where there are fewer same-brand dealers in a given area, consumers pay more for new cars. For example, increasing the distance between Honda dealers by 30 miles increased the average price paid by consumers for the popular Honda Accord by $500. For nine of the 10 models studied (the outlier had some data problems), the closer (in miles) the same-brand dealers were, the lower prices the consumers paid. The bottom line: More dealers competing in a market means lower prices for consumers.

But the FTC’s staff is ignoring the data.

For example, in a letter dated May 7, 2015 to a concerned Michigan state senator, the FTC’s staff rejected out-of-hand the notion that competition among same-brand dealers saves consumers money. According to the FTC’s staff, my ability as a consumer to pit rival Ford dealerships against each other for my business is of no consequence, or at least much less consequence than pitting a Ford and Toyota dealer against each other. (I suspect most car buyers would disagree, otherwise Edmunds.com and other consumer-oriented websites wouldn’t have any traffic.)

The FTC’s staff says their position that intra-brand price competition among competition dealers does not lower car prices is “not merely a theoretical possibility,” but that it is based on strong statistical evidence. But what evidence do FTC staff members offer to support this peculiar position? They cite a study published 16 years ago analyzing state limitations on gasoline refiners’ ability to operate their own gas stations.

What do gasoline refineries have to do with car prices? With all due respect to the FTC’s staff, when a simple Google search of “intra-brand auto competition” would have led to more relevant (and recent) empirical evidence, such intellectual laziness does not inspire confidence that the FTC can be trusted to hold a neutral workshop.

The error in the FTC’s thinking is echoed by many other opponents to automobile franchise laws — that such laws represent a barrier to entry and thus reduce the number of retail outlets for new car purchases. Licensure may limit market entrants and competition in other industries, but this is patently not the case in automobile retailing. Automobile analysts believe that repeal of state franchise laws would result in a substantial contraction in the number of sellers — and we know from data that this would mean higher prices for consumers.

For example, in Texas, where there has been pressure to allow manufacturer-direct sales, Bill Wolters, president of the Texas Automobile Dealers Association (TADA), has stated that easily two-thirds of Texas car dealerships would be at risk if the law against manufacturer ownership of dealerships is eliminated. This reduction of dealers would reduce intra-brand competition and put upward pressure on car prices.

Every day, consumers reap the benefits of an intensely competitive market for new cars, and it appears that the current auto dealer franchise system has a significant part in making this so. (Indeed, in the Washington, D.C. metropolitan area alone, consumers can shop at over 20 different Toyota dealers to buy any make and model of Toyota.) Accordingly, any in-depth and unbiased analysis of these complex state laws must first focus how such laws affect consumer prices for new cars. It’s not really important how state laws governing some other industry affect that industry’s prices. State auto franchise laws have their own unique effect on the industry structure of automobile retailing. We must focus on those specific effects on consumers.

Unfortunately, given the FTC staff’s apparent bias — exhibited in a careless regard for the evidence — I doubt that such focus will be present in today’s workshop.

Ford is the chief economist of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age. A copy of its study, “The Price Effects of Intra-Brand Competition in the Automobile Industry: An Econometric Analysis” may be downloaded free from its website.