Pub. 55 2014-2015 Issue 1

33 2014 FALL in the vehicle marketplace. 24 Automakers set suggested retail prices (as required by law), but new cars sell most often below the manufacturer suggested retail price (or MSRP). As previously noted, it is simply not possible for dealers to sell vehicles at prices – on average – that are greater than what the market will bear at any point in time. Moreover, the dealer’s current inventory and local market conditions continuously influence price as does competition within a vehicle segment. Auto manufacturers might sponsor regional marketing programs that can temporarily impact demand for a specific model. But rival automakers or their deal- ers will respond if they lose market share. These forces ensure that consumer pricing is in tune with market demand. This highlights one of the possible adverse and unintended consequences of removing the current vertical restrictions on manufacturers entering the retail auto market. A manufacturer- controlled system would probably be more averse to changing prices and would certainly be slower in responding, even if such pricing was demanded by local and/or regional market condi- tions. A manufacturer would thus face increased inventory and carrying costs, which would inevitably be passed on to the consumer. The same underlying factors that lead to locally adjusted vehicle prices also enable fierce intra-brand competition among dealer- ships. This intra-brand competition benefits consumers by ensur- ing that there are multiple retailers of the same brand in the same market facilitating both price competition and superior customer service as they compete for business. Even with the decline in the number of dealerships due to (1) natural consolidation, (2) the elimination of brands, and (3) the dealer and manufacturer bankruptcies that occurred during the 2008-2009 recession, the majority of consumers can do business with more than one dealer of a given brand within their local market. This means that customers have convenient access to a system that supports competition both among same-brand dealers and among those of competing brands. Since many car buyers don’t settle on a specific make and model until well into the buying process, competition exists among brands at the dealership level just as it does among the manufacturers. As shown in the following chart, data developed among se- lected dealer marketing areas across the country for Chevrolet, Ford, Toyota, and Honda illustrates just how extensive the intra- brand choices that shoppers have are when they are buying and servicing their cars. Keller & Elias at page 15-16. These data demonstrate that, even in the 175th largest local market area (which has fewer than 95,000 homes), consumers have multiple same-line dealer choices for many of the major automobile brands. The studies by Rogers and Eckard are fundamentally flawed, as discussed above. However, if we accept their premises, then the FTC’s own research supports the benefits of intra-brand competition. Your writings cite Rogers’ criticisms of laws that regulate the “establishment of new motor vehicle dealerships near existing dealers selling cars of the same make.” 25 In particular, your writings note that Rogers “found that these state laws harmed consumers because they caused motor vehicle prices to rise.” 26 In other words, limiting the number of independent, same-brand dealerships in a given area increases vehicle prices for consum- ers by reducing intra-brand competition. But if that is true, the converse must be true as well – namely, that increasing the number of independent, same-brand outlets in a given market will cause prices to fall. 27 And this is exactly what the state laws restricting vertical integration are designed to do. Those laws recognize that the intra-brand competition that is inherent in the franchised dealer system benefits the consumer. 28 Dealer Counts by Selected Market Areas and Brands Dealer Count Based on OEM Website by Zip Code Rank Market Area Zip TV Homes % USA Chevrolet Ford Toyota Honda 25 Charlotte, NC 28201 1,136,420 0.995% 21 20 9 12 50 Jacksonville, FL 32201 659,170 0.577% 12 10 5 5 75 Omaha, NE 68101 414,060 0.363% 17 15 4 3 100 Greenville - New Bern, NC 27833 303,280 0.266% 13 15 7 5 150 Albany, GA 31701 150,110 0.131% 9 11 2 2 175 Lake Charles, LA 70601 94,610 0.083% 6 6 3 1 200 Ottumwa-Kirksville, IA 52501 46,730 0.041% 5 8 1 0 All US DMA 114,173,690 100.000% Nielsen Local Television Market Universe Estimates by DMA as of 1-1-13 210 Total Markets = 100% Coverage of US TV Homes Dealer counts limited to identified franchises within 50 miles of submitted zip code. 24 Maryann Keller and Kenneth Elias, Consumer Benefits of the Dealer Franchise System, 2014, at page 13-14. This study, a copy of which is available here, contains a com- prehensive analysis of the consumer benefits of the independent franchised dealer system. 25 Your letter to the New Jersey legislature at page 3. 26 Id. 27 Other studies illustrate the positive effect of intra-brand competition. First, Scott Morton et al. imply that consumers that visit multiple dealers spend less on their new ve- hicle than those that visit only one dealer. This would lend support for the value of strong intra-brand competition. Second, studies of elasticities in the automotive market illustrate a strong bias toward healthy competition. McCarthy (1996) estimates U.S. elasticity for new vehicles at -0.87 while Bordley (2006) estimates -1.0. (P.S. McCarthy, Market Price and Income Elasticities of New Vehicle Demands, Review Of Economics & Statistics, 78(3), 543-547, 1996; R.F. Bordley, Estimating Automotive Elasticities From Segment Elasticities and First Choice/Second Choice Data, originally in 28 It should be noted that the RMA laws that were the subject of Rogers’ study address arbitrary actions by manufacturers in adding franchises to the market. Importantly, they do not prevent a manufacturer from adding a franchise in a given area; rather, they merely subject a proposed addition to a possible protest where the manufacturer must justify its appointment of a new dealer in order to proceed.