Who decides how consumers should shop?

Consumers once shopped predominantly at their local stores; but first mail order catalogs and today the Internet have created new ways to shop for and purchase a wide range of goods and services. Similarly, consumers once arranged for taxis by hailing one from a street corner or by calling a dispatcher; yet today, smartphones and new software applications are shaking up the transportation industry, creating new business opportunities and new services for consumers.

In buying cars, however, these new ways to shop may not be available to consumers. For decades, local laws in many states have required consumers to purchase their cars solely from local, independent auto dealers. Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries.

This very question has been raised across the country, as a still-young car manufacturer, Tesla, pursues a direct-to-consumer sales strategy that does not rely on local, independent dealers.

In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy for a number of reasons.

American consumers and businesses benefit from a dynamic and diverse economy where new technologies and business models can and have disrupted stable and stagnant industries, often by responding to unmet or under-served consumer needs. When that occurs in an industry long subject to extensive regulation, existing businesses—like automobile dealers—often respond by urging legislators or regulators to restrict or even bar the new firms that threaten to shake up their market.

Out of 15 million cars sold in the U.S. in 2013, Tesla accounted for a little over 22,000. This hardly presents a serious competitive threat to established dealers. What it could represent is a real change to the way cars are sold that might allow Tesla to expand in the future and prove attractive to other manufacturers, whether established or new ones that have yet to emerge, and consumers. Efforts to litigate, legislate, and regulate to eliminate Tesla’s perceived threat have forced it to battle jurisdiction-by-jurisdiction for the simple right to sell its automobiles directly to consumers.

When the automobile industry was in its infancy, auto manufacturers recruited independent, locally owned dealers to reach consumers in localities across the country. State laws progressively embraced wide-ranging protections for these dealers due to a perceived imbalance of power between the typically small local dealers and major national manufacturers. Dealers persuaded lawmakers that they needed protections from abusive practices by manufacturers. Federal laws, too, developed to protect auto dealers from abuse.

These protections expanded until in many states they included outright bans on the sale of new cars by anyone other than a dealer—specifically, an auto manufacturer. Instead of “protecting,” these state laws became “protectionist,” perpetuating one way of selling cars—the independent car dealer. Such blanket bans are 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.

Dealers contend that it is important for regulators to prevent abuses of local dealers. This rationale appears unsupported, however, with respect to blanket prohibitions of direct sales by manufacturers. And, in any event, it has no relevance to companies like Tesla. It has never had any independent dealers and reportedly does not want them. 

FTC staff have commented on similar efforts to bar new rivals and new business models in industries as varied as wine sales, taxis, and health care. We have consistently urged legislators and regulators to consider the potential harmful consequences this can have for competition and consumers. How manufacturers choose to supply their products and services to consumers is just as much a function of competition as what they sell—and competition ultimately provides the best protections for consumers and the best chances for new businesses to develop and succeed. Our point has not been that new methods of sale are necessarily superior to the traditional methods—just that the determination should be made through the competitive process.

Change is a critical dimension of that competitive process. Manufacturers in a variety of industries now reach consumers directly through websites, providing extensive information that was once only available from dealers or by phone or mail inquiry. And consumers routinely turn to the Internet as a convenient way to comparison shop and buy products and services. 

Such change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors. Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated. We hope lawmakers will recognize efforts by auto dealers and others to bar new sources of competition for what they are—expressions of a lack of confidence in the competitive process that can only make consumers worse off.

Andy is the Director of the Office of Policy Planning, Debbie is the Director of the Bureau of Competition, and Marty is the Director of the Bureau of Economics. The views expressed are their own, and do not necessarily reflect the opinion of the Commission or of any individual Commissioner.

Comments

This is not an official FTC statement; 3 senior execs posted this on the agency blog, under their own names.
This is great! This new sale model could potentially save a manufacturer a lot of money through increased efficiency. Thus more profit will go to the few and potentially increase the concentration of wealth. It is good in general but new taxes should be created to recapture some of the savings and distribute it to the locality. Thus in effect decreasing wealth concentration and distribute market efficiency to more people.
I think Elon Musk has demonstrated he takes his profit--to the point of bankruptcy!--to provide quality products to consumers and wonderful jobs to employees. I just ordered my first Tesla, am taking a second job to pay for it, because I believe Tesla Cars are the best product out there.
Nice post! Now just to fix your BS stance on net neutrality and i'll say you guys had a good day at the FTC!
It's the FCC with the bogus stance on net neutrality, not the FTC.
Bravo to all three authors for getting this issue out front. My wife and I have owned one Tesla for 4 years and a second for 16 months. Without question, Tesla has the best customer service ethic and performance of any manufacturer/dealer we have ever dealt with. This is REALLY what NADA is afraid of, this disruptive business model is not just a different way of selling cars, it is a totally different what for a car maker and a car owner to interact. The existing system does not work in consumers' best interest, not just in setting prices, but in setting expectations for product announcements, participation in the design and product refinement process, and especially in service. Please press for federal action on this matter, so that Tesla does not waste anyone of their incredible resource fighting this silly fight from state to state!
Well done! Thanks!
If you are interested in a scholarly look at the effect of present dealership laws then read this Yale study: http://faculty.som.yale.edu/FionaScottMorton/documents/StateFranchiseLawsDealerTerminationsandtheAutoCrisis.pdf The actions of the dealerships are nothing new. If you Google the term "rent seekers" as it applies to economics you will see that this is typical of what happens when old processes are threatened by new ones.
Thank god... 'Lobbyists' didn't get to someone.
Obviously, the three people who wrote this have never spent a day working in the real world. They have absolutely no clue how competition works. By advocating a manufacturer run outlet system for vehicles, the consumer will be the one who suffers in the end. Do you suppose that a consumer can negotiate with a multi-billion dollar corporation? No way. The consumer will pay list price. Plus, the manufacturer will not want to deal with small town stores, so the consumer who lives say, 100 miles from the nearest large city, will have to spend many hours and many dollars getting to and from the outlet to purchase the vehicle and also to have warranty work done. These 3 bloggers are not expressing the opinion of the FTC. They did this on their own and quite obviously, didn't think through this before posting it. If you think this is a good idea, you haven't thought it through either. I can guarantee that if this ultimately happens, the consumer will pay thousands more for vehicles and will be harmful to the economy.
The list price is just a made up number with bloated dealer profits build in. Selling under list price just lower the profit to the dealer (which never go to $0, regardless of what the sales person claims). Consumer "savings" are not real, they were just going to pay too much to the middle man if they did not haggle. If Telsa wanted to play that game they could say the "list price" is $200,000 , then negotiate with every one down from there. Good negotiators get it for $80k, bad ones pay $100k, and some poor smuck pays $200k. How is that better that just saying the car cost $80k, buy it if you like the car?
Competition is between different companies, not "within" a company. It's not about buying a Big Mac in both Burger King and MacDonnald's it is about choosing between either having a Whopper or a Big Mac and going to the restaurant that offers your choice. Its a very simple thing: society decided that cars should be allowed to be traded freely (as opposed to e.g. illegal drugs) by allowing private individuals to buy and sell used cars to each other. Thus no state government has any business in forcing car makers to use a middle man. This is still America, a society based on the firm belief in capitalism and the free market economy.
You've missed it. Either you're interests are aligned with the car dealers, or you're assuming a false fact about what value a dealer provides. They're a middle man, plain and simple. Every product they offer (with a slight exception for a portion of service) is simply resold. That reselling inherently requires that they include a fee for their "time/value". What will change is that consumers will be buying cars closer to the price the dealer would have paid for it. Of course the manufacturers will want as much as possible, but like it works today in the dealer world, the market itself will dictate what the car will sell for. The biggest win from my perspective is that it removes the absolutely horrible user experience of having to "negotiate" with a guy who has to go talk to another guy. Or, sign on this line and I'll see what I can do, or tell me what monthly payment number you're interested in and we'll fudge stuff around so you can't tell what's up or down and screw you over, yet still hit the payment. Dealers are bad for the market, in today's world of information access their suggestions and expertise aren't necessary (and are usually biased to a fault). My next car won't be from a dealer, and my friends and colleagues feel the same way. The market is shifting. The new car dealer will die, because their value proposition just isn't valuable anymore. The service model will need to be accounted for, but again the dealer is marking up parts from a manufacturer, and since the car brand itself is the one that truly cares about the lasting relationship with the consumer - I honestly feel that service will improve as well. A car dealer's only product is the deal itself, since they don't actually create anything, they're also artificially motivated to sell TODAY (so they can hit some monthly, quarterly, etc... tier and get their bonuses from the manufacturer). A car manufacturer is selling a product. Regarding the issue of access, the same could have been said about buying a fridge 10 years ago. If you live in a small town you might not have an appliance dealer available. Today you can research that appliance online, read unbiased reviews from consumers and trusted sources, purchase the product at your leisure, and have it arrive at your door. If you can't see the writing on the wall, you're not paying attention. It is a mistake to think that the new model must operate just like the old model, e.g. dealer showrooms on main street, etc... Online showrooms, test drives by appointment from a service center, or perhaps from your home. Since the overhead and middlemen fees will be reduced, the manufactures will have leeway to get creative with their sales and delivery models. Goodbye dealers!
If dealerships are so beneficial, then let the consumer decide. Stop lobbying the government to ban direct sales of cars. If the dealership model is truly what the consumer wants, then you have nothing to be afraid of.
Michael: "consumer can negotiate with a multi-billion dollar corporation? No way... manufacturer will not want to deal with small town stores." Perhaps, but only if there were just a handful of manufacturers. With online reviews, consumers can get lots of information about which car salesmen treat customers the best, and which are charging a fair price or willing to negotiate. Since there are a dozen manufacturers of mainstream cars in the U.S. this ensures competition. Don't like the way Chevy treats you? Go look at a Ford. Unhappy with Ford? Look at a Chrysler. No? Look at a Hyundai. Still no good? Check out Toyota. Still a problem? Go to Nissan. Still no satisfaction? Check out VW. VW treats you Very Wrong? Go to Honda. Still unhappy? Check out Mazda. No good? Go to Subaru. You get the point.
Worried about your little dealership monopoly going out of business, eh? "The consumer will pay list price." That is a good thing! Why should one person pay a different price that another just because he's a better negotiator. It's ludicrous unless you're the greedy dealership trying to wring every last dollar out of "customers". Dealers tack on unwarranted things "documentation fees" and "destination charges".
I would highly recommend doing some reading on how dealerships make money before making the assumption that you have any negotiating power at all. Edmunds has a very good article on the topic (http://www.edmunds.com/car-buying/where-does-the-car-dealer-make-money.html) that shows the margins are so low in a new car you cant possibly have any room for negotiation unless the dealership raises a price simply to lower it. This has been my experience when comparing the price on an identical new vehicle between multiple dealerships with no financing or trade-in involved. Both dealerships neglected to mention the dealer cash rebates they would get for the vehicle and were both willing to lower the car to the exact same price but started at two different amounts. Both were not willing to lower the price below a certain point even though the manufacturer (GM) was offering the dealer an additional $1000 to move that model off of the lot which I learned about by talking to a runner during a test drive. If I truly had any negotiating power or the dealers would have considered cutting into their dealer cash allowance and still had a greater margin than the average sale. There is no data that currently supports the argument that you will have any less negotiating power with Tesla than you would with a dealership. Tesla has a lot more to lose if they play this same game as a lost sale could result in ill will directed at a manufacturer or model, not just a dealership. A bad salesman at a dealership can cost the dealership a sale but has no bearing on whether you purchase that same car from another dealer. A bad salesman at Tesla could cost them a sale now and into the future. If we never allow Tesla or another manufacturer the chance to try this out we will never see any changes in how the game works. Regulations should be based on solid data, not assumptions and lobbying. If manufacturers start abusing their power then regulate them; but only after there is solid data.
A fine and persuasive piece. What applies to passenger vehicles applies as well, in many states, to commercial trucks. FAAAA preemption could be used today by the FTC to dismantle the entire state dealer-protectionist structure as it applies to heavy and medium trucks. How about starting there?
I'm happy you are supporting Tesla in its fight against car dealers. Speaking from experience, buying a car from a dealer is one of my worst experience in my life and once Tesla has a cheaper car - I will never buy from car dealers again!!
This one sentence says it all: Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated.
Car dealers are already in a panic over companies like True Car. They are seeing the traditional car business die right in front of them and aren't at a loss as what to do. The manufacturers are watching Tesla with great interest, because if they succeed at going direct to consumer. As for all the "sky is falling" comments about how dealers somehow keep the prices low, they charge what the market will bear and that will be the same if they are involved or not. The problem they have is the day is coming where they aren't necessary and they know it. Claiming that dealers make cars cheaper is fairly disingenuous. Let's see. There are about 3,200 dealers that Ford supports. They probably get an average of $20,000 each in coop advertising reimbursements. Ford alone would eliminate about 3/4 of a billion a year that they have to tack onto the cost of a car. We are approaching a time where we switch from dealerships to distribution hubs. A time where you go to Costco or Sam's Club to test drive and order a car. The consumers want it, like it or not it will happen.
It's about time! Car dealers have had a stranglehold on the retailing of automobiles for decades. They do a lot for customers and their communities, but they will improve their businesses if they have competition. Ironically, many of them are the biggest free market advocates you'll find anywhere.
Michael - Again, the consumer doesn't _have_ to "negotiate" with the car company. They either buy the car or they don't! If they don't like the Tesla, they go to other makes & models. If you think the car companies will all conspire to prevent the consumer from getting cars they want then you're talking about illegal collusion and that should be pursued. Otherwise, those manufacturers are simply creating an environment where the consumer is hungry for an alternative and will embrace a new/disruptive entry into the market (Tesla says "Hello!"). And I'm sorry, but this obsession with "list price" is ridiculous. List Price is a totally ficticious number made up by the car manufacturers and dealers. All it does is enable them to sometimes make a much-larger-than-normal profit on a sale, and occasionally make almost-no-profit on a sale. Even when a dealer sells a car "below invoice price", they may still make a net profit on the deal because of other financial arrangements and incentives between the dealer and the manufacturer. It would be far better if we eliminated the "list price" myth/game and people paid a fair price (including a reasonable profit-margin). We do that with retail purchases and appliances all the time.
Competition is between different companies, not "within" a company. It's not about buying a Big Mac in both Burger King and MacDonnald's it is about choosing between either having http://www.onlinewebsatis.com/
I'd be very interested to know if federal law or precedent could be invoked here? Because of inevitable court challenges you'd need to have a constitutional basis for the ability of the federal government to intervene. Seems like the commerce clause makes sense when a manufacturer is trying to sell a product nationally? Isn't their company ultimately involved in interstate commerce? That being said there are ridiculous state and local laws governing who and how alchohol is sold (thinking the distributor network) that surely would have been challenged by beverage companies by now so I'm guessing I'm missing something? I just wish these dealers would stop trying to fight the future!
One day I hope to be able to buy a car as easily I buy an Apple computer: directly from the manufacturer. Go FTC!
I agree 100% with the above article. For too long states in the name of "protecting consumers" have been the main impediment toward direct sales and competition in many industries, such as Out of state insurance (Home, car, health, auto extended warranties). It is time these barriers are eliminated so new players can compete and new innovative products can have a chance in the market place. I would like to add that the upcoming merger of Comcast and Timer Warner is a case in point, if it goes through it will reduce competition and it will be impossible for new players to introduce lower internet rates and products in the market place, to the detriment of all consumers. Th solution would be for the cable companies to allow other companies to lease bandwidth at a low wholesale price so new companies could come in the market and compete.
Thanks FTC (or at least, Andy Gavil, Debbie Feinstein, and Marty Gaynor) for supporting the free-market system in the United States.
Insightful input from the FTC. I believe most of the comments are missing the point. It is not whether the Direct Sales model is better or worse than the Indirect/Dealer model. The marketplace and consumer can decide. However, in many states, they are not allowed the choice. The real issue is, should a Business be allowed to offer the Direct Sales option, and the FTC opinion is clearly yes.
I don't currently own a Tesla and will probably never be able to afford one. (With 1 son and 6 daughters, all my disposable income is going towards weddings and education expenses these days). However, the Tesla and many future designs like it, will never be able to experience a true 21st century entrepreneurial growth spurt if they're forced to conduct business using 19th century sales models. Imagine if Amazon had been forbidden from selling in states where they had no retail outlets? Or if Netflix could only stream video in states where they also had rental locations? As the FCC mentions in this blog post, changing these rules could represent a huge and positive change for the American public. While the US has seen new foreign car companies selling into our markets (think of Hyundia, Kia, et al), it will be impossible for a new American car company to launch and grow to prominence without the ability to use new and alternative sales models. Dismantling the old protectionist rules will help revitalize the American car business and also enable US engineers and entrepreneurs, arguably the best in the world, to innovate in new and amazing ways.
Most people don't like change especially when it threatens the status quo so its not surprising that dealers are pulling out all the stops to prevent a company like Tesla messing with their monopoly. However, in the end common sense will prevail. But in the meantime a lot of cash is going to be changing hands in back rooms to try and hold back the tide. NJ for one has the best laws money can buy...just ask Chris Christie ;0)
Thank you, FTC, for fighting for the U.S. consumers' rights!
I have never had a positive buying experience at a dealership. I hate bringing my car to a dealership for service. I always feel like I am being ripped off. So much for protecting the consumer.
RE: "These protections expanded until in many states they included outright bans on the sale of new cars by anyone other than a dealer—specifically, an auto manufacturer." This is true in some states ALTHOUGH even in those states, OEMs own many of their own points in partnership with a investor/operator with a buyout agreement. RE: "Instead of “protecting,” these state laws became “protectionist,” perpetuating one way of selling cars—the independent car dealer." This only impacts Tesla, and the legacy OEMs want no part of competing with their own dealer network. RE: "Such blanket bans are 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." Let's say Toyota suddenly decides to compete with its own dealers. How would that work? Does anyone think Toyota should undercut their dealer's prices on a direct basis? What would happen if the did? Have these geniuses thought this through? Which OEM wants to go first? Would the OEMs wait until their franchise agreements with their dealers terminate before setting up a "direct to consumer" system? Or do they just open a direct portal and undercut their private cap dealers' prices... you know, the same dealers who financed the OEM's distribution system allowing the OEMs to retain the necessary capital to expand their business and compete with other legacy OEMs? What kind of idiots think the private cap dealers would stand for this? Imagine the disruption and chaos should a legacy OEM try such nonsense. Where would the OEMs get the capital to buyout or replace their private cap dealers? Take a dealer who just made a $30 million investment on behalf of his/her supplier. What kind of idiot thinks an OEM would or could just arbitrarily undermine that partner's investment? Why would they do such a thing?
All shop keepers or dealers are not faithful to consumers as their motive is to sell goods anyhow. They only think of selling goods instead of fulfill the wants of customers. Now a day shopping has become so easy as there is a facility of internet. We can order anything through internet. The main advantage is we can save time & effort. Cars are sold in dealer shops or any company authorized shops. Customers go to these shops & buy cars for their necessity. Customers know about these shops through internet, news, media etc so that promotion is possible for them. http://www.medwayimports.com/newandusedcars.aspx
RE: "I am very happy to see the FTC take this position." I guess you didn't read the part where it says this isn't the official position of the FTC.
RE: "In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy for a number of reasons." As a matter of record, in the auto industry, it wasn't state and local regulators who eliminated direct purchasing options for consumers, it was the OEMs themselves who needed access to independent dealer/business peoples' access to capital, retail acumen, and local connections and relationships. Since no business person was going to take a business risk and invest if it meant possibly having to compete against one's own supplier, the franchise agreements included stipulations to protect the investment of the very people the auto OEMs needed to satisfy. If these FTC managers don't know the origin of the auto dealer franchise system, it is a scary proposition on its face. And I'm a guy who thinks Tesla should be allowed to own its own dealerships as long as they own them all. If legacy OEMs want to sell direct, they can buy out their franchised dealers and go for it. What's keeping them from that? Hundreds of billions of dollars? Which OEM will be first? After all, we know how well auto OEMs retail their own product. Why would a legacy auto OEM want to compete with their own partner/dealers? Why would they entertain such lunacy?

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