Pub. 55 2014-2015 Issue 1

32 II. Public Policy Considerations Fully Justify State Determinations To Prohibit Vertical Integration InThe Sales of Motor Vehicles Against the foregoing backdrop of economic analysis, it is now appropriate to consider whether there are public policy impera- tives which support state laws that limit vertical integration in auto retailing. As noted above, even your writings acknowledge that the presence of such policy considerations would warrant the enactment of those laws. And, upon review, we can see that these policy justifications abound. A. The unique nature of automobiles justifies state regulation of their dis- tribution. As a threshold matter, it is important to note that some form of state regulation of the vehicle distribution process is both highly appropriate and desirable. The acquisition of an automobile is a singular experience that is not comparable to the purchase of virtually any other consumer good. The unique nature of an automobile purchase explains the litany of regula- tions which affect both the vehicle itself and the retail process that accompanies it. All states regulate important retail mar- kets (such as those in the eyewear and real estate industries) to protect consumers. Thus, it should come as no surprise that laws have been enacted to protect consumer interests by addressing the unique facets of car purchasing and ownership. The purchase of an automobile is often a person’s second largest purchase, in dollar terms, after a home. Before even beginning the purchase process, consumers conduct extensive research, including back-to-back vehicle comparisons and test drives at local dealerships. Vehicle acquisition typically requires financ- ing, often taking into account a past loan or the acceptance and valuation of a trade-in vehicle. According to Experian, nearly 85% of all new vehicle transactions are financed, thereby creating the need to identify a competitive financing alternative given family budget and down payment requirements. 21 Moreover, in excess of 60% of car purchases involve a trade-in, and those trades often carry an outstanding loan balance. This requires the additional step of requiring a payoff of the current loan. Finally, to complete the acquisition process, motor vehicle titling and registration processes must be navigated. This usually requires additional assistance. An automobile also differs from most consumer products in that ownership presents several ongoing operational require- ments throughout its life. These include securing an operator’s license, ensuring that one holds all the necessary insurance, and performing regular maintenance and other repairs and/or recall work when needed. (And the latter needs are present regardless of the vehicle’s powertrain.) 22 Especially in light of the significant investment that consumers make in their vehicles, all of these services are continually required whether or not the vehicle’s original manufacturer remains in business. The acquisition and ownership of a motor vehicle thus involves a fair amount of complexity. For all these reasons, the unique at- tributes of motor vehicles explain why a state legislature would be justified in deciding to impose a regulatory and licensing scheme on the distribution of vehicles and the companies that participate in that distribution channel. B. There are strong policy reasons that warrant restricting direct manufacturer-toconsumer sales whether or not a manufacturer has existing dealers. There are several compelling public policy concerns that fully justify the various states’ determinations to build their regula- tion of vehicle distribution around the limitation or prohibition of vertical integration. The primary benefits of such regulations include the increased intra-brand competition that independent dealers foster, the safety benefits that independent dealers bring by being economically aligned with consumers’ interests, the in- creased long-term accountability that independent dealers provide, and the local economic benefits that independent dealers create. 1. Independent franchised dealers foster price competition which lowers prices for consumers. Simply put, a non-vertically integrated vehicle distribution system of independently owned, franchised dealers ensures competition both among and within brands, all to the benefit of the consumer. As you note in your writings, “[c]ompetition is at the core of America’s economy, and vigorous competition among sellers in an open marketplace gives consumers the benefits of lower prices, higher quality products and services, and greater innovation.” 23 We could not agree more with this sentiment, and we fail to see how eliminating thousands of independently owned businesses would positively impact prices or quality of service. We can, however, quickly ascertain that reducing competition is inher- ently harmful from an economic perspective and that it is precisely the state franchise laws that you question that best facilitate the “vigorous competition” that you seek for the automobile market. Market fluctuations, both economy-wide and specifically in the automotive industry, are constant and ever-shifting. A vehicle distribution system of independently owned, franchised dealers ensures that market fluctuations are accurately reflected 21 State of the Automotive Finance Market, Experian Automotive, Fourth Quarter 2013 (available here). 22 Vehicles also contain hazardous materials that are themselves regulated, and, if operated incorrectly, vehicles can result in the injury to, or death of, people. 23 Your letter to the New Jersey legislature at page 3.