Pub. 55 2014-2015 Issue 1

30 the comparison based on the crucial fact that gasoline is a highly fungible commodity product that is readily traded on global spot markets, whereas automobiles are a highly differentiated product. Further, a paper recently published by Rand explained that the “Federal Trade Commission and the Department of Justice are the two main agencies in the US in charge of looking for and prevent- ing anticompetitive practices, and a sizable portion of their budgets is allocated to overseeing the gasoline industry.” Jaureguiberry (2010). 8 This paper goes on to note that the need for this sizeable oversight is because “[e]ven after 40 years of active intervention, much is left to be learned about the main issues affecting the prices in this market, among the most important the underlying pricing strategies behind the retail gasoline market[.]” Jaureguiberry We question the use of a highly substitutable commodity product in comparison to the automotive retailing industry, especially when the gasoline industry requires so much oversight and lacks the pricing transparency available to motor vehicle retail consumers. B. Market power in retail distribution You also contend that consumers are affirmatively harmed by state-mandated vertical separation and that the removal of restric- tions around vertical integration would allow consumers to benefit from the elimination of double marginalization and a reduction in search costs. 9 You further argue that if vertical integration were permitted, manufacturers would be better able to match their products to consumer preferences and would be able to respond more rapidly to uncertainty or changing business environments. We look first at the case of double marginalization. This dy- namic only occurs in industries where there are successive stages of monopolistic or oligopolistic firms. We agree that when two monopolistic or oligopolistic firms integrate, mark-ups are elimi- nated and the prices charged to consumers are reduced. In such a market, vertical integration does clearly benefit consumers. But is auto retailing such an industry? Bymaking the foregoing argument, you imply that both automobilemanufacturers and automobile deal- ers have market power and that, by extension, the resulting mark- ups must be pervasive. However, you present no actual statistical evidence to support these claims of oligopolistic practices by either manufacturers or dealers, and we are not aware of any ourselves. The second claim you make in this connection is that manu- facturers would become more efficient at matching their products to consumer preferences were vertical integration permitted. To begin, this represents a fundamental misunderstanding of product development lead times in the automotive industry. Typically, research and development in the automotive industry takes up to 6 years for a completely new vehicle and requires an intensive process involving billions of dollars. Hill, et al. (2007) 10 Even changes to production vehicles (beyond basic trim level mixes) take months of lead time, not because manufacturers do not know consumer preferences but because of organizational, engineering, and manufacturing constraints. Hanawalt &Rouse (2010) 11 These factors should not be ignored. 12 You also suggest that the importance of search costs in auto- mobile transactions leads consumers to visit multiple dealerships. But the facts that motor vehicles represent one of the highest cost purchases for a household, that consumers purchase them relatively rarely, and that they represent a long-term financial investment would naturally lead one to conclude that individuals will spend a fair amount of time seeking out their personal preferences and price points. Once again, you do not present any statistical evidence showing that, in the face of these other factors, cur- rent search costs would be reduced through vertical integration. Rather, you simply claim that these search costs may be reduced because dealers prefer to sell out of their inventory and that this preference requires consumers to spend more time than would otherwise be necessary in searching for their preferred model. In our review of Scott Morton, et al. (2011), 13 we see no evidence for such a conclusion. More telling, from the papers cited, it is unclear why or how vertical integration would improve upon or change the existing search methods used by automotive retail consumers. Indeed, Scott Morton, et al. suggest that consumers have ready access to comparative price information, and the results of their survey show that 82% obtained information by searching the internet and by obtaining offers from competing dealers. We question how this would change in a market with vertically integrated retail outlets. Most significant, Scott Morton et al. found that buyers who ob- tained price quotes frommultiple dealers secured price reductions. This suggests that intra-brand competition was effective. C. Distribution and E-commerce Your third argument for vertical integration is that vertically integrated firms are able to respond more effectively to uncertainty and changes in the business environment. In addition, you contend 8 Florencia Jaureguiberry, An Analysis of Strategic Price Setting in Retail Gasoline Markets, Rand Corporation 2010. 9 Your letter to the New Jersey legislature states, at page 5, that “when the government intervenes and outlaws vertical integration, consumers often experience worse service and higher prices.” 10 Kim Hill, Steven Szakaly, and Morgan Edwards, How Automakers Plan Their Products: A Primer for Policymakers on Automotive Industry Business Planning, Center for Automotive Research, 2007. 11 Edward S. Hanawalt and William B. Rouse, Car Wars: Factors Underlying the Success or Failure of New Car Programs, Systems Engineering 13 no. 4: 389–404, 2010. 12 The FTC comments submitted to James Oberweis in 2014 relate to the Illinois legislature’s consideration of a ban on Sunday auto sales. Although those comments claim that a ban on Sunday sales would impede comparison shopping, would not reflect consumer preferences, and would diminish competition among dealers for automobile repairs and sales, they offer no actual statistical evidence on the number of cars sold or repairs completed on Sunday. Consequently, it is impossible to judge the materiality of a ban on Sunday sales or the relevance of this analysis to current debate on vertical integration regulations. 13 Fiona Scott Morton, Jorge Silva-Risso, and Florian Zettelmeyer, What Matters in a Price Negotiation: Evidence from the U.S. Auto Retailing Industry, Quantitative Marketing & Economics 9, no. 4: 365-402, 2011.