Pub. 55 2014-2015 Issue 1

28 July 17, 2014 Andrew I. Gavil, Director, Office of Policy Planning Deborah Feinstein, Director, Bureau of Competition Martin S. Gaynor, Director, Bureau of Economics Federal Trade Commission 600 Pennsylvania Avenue, N.W. Washington, D.C. 20580 Dear Mr. Gavil, Ms. Feinstein, and Mr. Gaynor: We are writing in response to the blog you posted on April 24, 2014 and the letters you sent to the Missouri and New Jersey legislatures on May 15 and 16, 2014 (collectively, the “FTC writ- ings”), all relating to the varying ways in which the elected state legislatures in the 50 states have opted to structure the marketplace for the sale of newmotor vehicles in their respective jurisdictions. 1 Your writings contend that the decisions some of those legislatures have made to restrict the vertical integration of motor vehicle dis- tribution operates to the detriment of consumers. We believe that your analysis misses the mark in a number of ways, including by failing to acknowledge how the franchised dealer network actually benefits car buyers through price competition, safety enhancement, and the creation of economic benefits for local communities. We would very much appreciate the opportunity to meet with you to discuss these matters and to engage in a healthy dialogue about these important consumer issues. OVERVIEW As we explain in detail in Section I. below, the economic analysis set out in your writings fails to recognize the highly competitive nature of automobile retailing, the salutary impact of intra-brand competition on auto consumer welfare, and the paucity of applicable research regarding the consumer benefits of vertical integration in our market. In fact, our analysis shows that there is no evidence that vertical integration in retailing, let alone automotive retailing, would provide any benefits to consumers. As such, it is simply not the case that consumers are harmed by a state’s determination to prohibit vertical integration in auto retailing. Moreover, there are several strong public policy considerations that, when properly understood, fully support the determination made by several states to restrict direct factory-toconsumer sales of motor vehicles. Indeed, even your writings acknowledge that the presence of such policy considerations would justify the regula- tion of the motor vehicle distribution channel. 2 In Section II., we comprehensively lay out the multitude of public policy reasons why these regulations are needed and appropriate. 3 As we explain in Section II.B., a number of these reasons (including the promotion of intra-brand competition, the proper alignment of economic interests for the performance of warranty work and safety recalls, the provision of greater long-term accountability, and the creation of extensive local economic benefits) apply whether or not a manu- facturer has established independent dealers to sell its products. But the need for the regulation of direct factory sales is even greater when the manufacturer has established an independent dealer network, and in Section II.C. we explain why. 4 The public policy imperatives that support the enactment of state laws restricting vertical integration of motor vehicle distribu- tion and sales are as valid today as they were when these laws were first enacted. These laws fully benefit consumers by promoting competition, safety, accountability, and economic growth. They also help ensure that consumers’ transportation needs are met by legitimate businesses with strong ties to the local community. Any state legislature that adopts such an approach is acting prudently and in the interests of its constituents. NADA President Peter Welch, his Executive Vice President for Legal and Regulatory Affairs Andy Koblenz, and NADA Chief Economist Steve Szakaly submitted the following letter to the Federal Trade Commission. The letter clearly outlines the benefits provided by franchised dealers to consumers throughout the nation. 1 The National Automobile Dealers Association (NADA) represents approximately 16,000 franchised automobile and truck dealers who sell new and used motor vehicles and engage in service, repair, and parts sales. Together, our members employ more than 1,000,000 people nationwide, yet a large majority of them are small businesses as defined by the Small Business Administration. 2 For example, on page 2 of your letter to the New Jersey legislature, you state that direct factory sales should be allowed, but only if “supportable public policy consider- ations” that justify regulation are “[a]bsent.” And on page 8 of the same letter you reiterate the point by noting that, in your view, consumers would be better served by the availability of direct factory sales, but only “absent some legitimate public purpose” for a prohibition. 3 As a preliminary matter, we describe in Section II.A. why acquiring a car is not like buying any other consumer product. For example, with vehicles you need an operator’s license, insurance, and financing; vehicles contain hazardous materials that are themselves regulated; and, if operated incorrectly, vehicles can result in the injury to, or death of, people. These unique attributes explain why regulation of the vehicle distribution channel is warranted in the first place. 4 Your letters to the two state legislatures argue that state restraints on vertical integration should be removed even where manufacturers have established dealer networks. However, your letters fail to recognize, let alone address, the myriad of additional policy considerations that are introduced in that context. When those considerations are included in the analysis, it becomes even clearer that state legislative action is warranted. Peter Welch’s NADA Answers FTC Misinformation Regarding Dealer Franchise Laws