FTC to Host Public Workshop Examining the U.S. Auto Distribution System Workshop Will Explore Competition, State Regulations, and Emerging Trends in the Industry, Project No. P131202
Today there has been a lot of confusion about intra-brand competition vs inter-brand competition. My own work has been cited for the proposition that franchised dealers are needed to create competition among car manufacturers. This is an incorrect application of my research results. If a manufacturer sells to independent FRANCHISED DEALERS then both it and consumers want lots of those dealers. Once the car has passed into the ownership of the dealer and the manufacturer wants the consumer to buy it, a lower retail margin is critical to competition with other brands. A single franchise dealer that owns the car has market power in its local area and will set a retail markup. That is why I, and others, have found that the RETAIL MARKUP falls with more dealers, or the amount of intrabrand competition. The application of a second margin by the dealer and the consequent higher final price is known as "double marginalization." However, this issue DISAPPEARS with a vertically integrated model of auto retailing because there is no retail margin (because there is no separate retailing firm). The combined manufacturer sets a price it thinks will sell cars against all the other brands in the marketplace. There is no transfer of ownership to the store and ZERO SECOND MARKUP. The combined manufacturer-retailer eliminates double-marginalization which is good for consumers. Interbrand competition does all the work.