Pub. 56 2015-2016 Issue 4

30 evidence was presented to justify any of the arguments against these laws. Turning to some of the assertions made at the Work- shop, we start with the RMA laws. Most importantly, these laws must be seen for what they are — a business- to-business regulation. They create a process of review whereby independent third parties are allowed to examine a manufacturer’s choice of placing a new retail outlet into a same brand dealer’s current area. These laws do not impact consumers and, in fact, are wholly invisible to any new vehicle purchaser. RMA laws simply do not grant any market power. In fact, we are unaware of any dealer with market power sufficient to charge monopoly rents. We also remain unaware of any empirical evidence that illustrates that any franchise law results in double mar- ginalization or excessive rents. In fact, quite the contrary is the case. The most recent study we have found shows that RMA laws may actually reduce prices in some cases (Walden 2005) 39 . This study, which uses price data col- lected from individual Honda dealers across the United States for a new vehicle with the same options, finds no positive price effect from dealer entry restrictions. In fact, the two dealer entry restriction variables included in the analysis actually had negative effects on price. Furthermore, as mentioned, the findings on the interac- tion of RMA laws with population density is contrary to the findings of Rogers (1986). 40 And Walden actually found that, in areas of higher population density, RMA laws may lead to lower prices for consumers. Walden also finds that the use of the internet in car shopping can yield lower prices for consumers, which is consistent with later research done by Scott Morton et al. (2011). 41 It is estimated that buyers shopping online receive an average price discount of $429. Finally, we want to underscore an important point regard- ing the new vehicle market that we made in NADA’s 2014 Letter. Simply put, in a workable competitive market for motor vehicles, we would expect that (1) the demand for individual automobile product lines would be more elastic than is the case for automobiles as a whole, and (2) if the demand for a motor vehicle is highly elastic, then a small reduction in price would capture a proportionally larger increase in market share. This would render unviable any attempt by an individual dealer to exploit a ban on direct manufacturing sales in order to extract higher prices. Empirical evidence confirms these observations. The elasticity of demand for new motor vehicles in the U.S. is estimated to be -0.87 by McCarthy (1990) and -1.0 by Bordley (2006). Product line elasticities are reported for the U.S. by Bordley (2006) and for Spain by Jaumandrou and Moral (2001). The results are reasonably consistent across the two studies in terms of the estimate range of elasticities by product line. The elasticities for individual product ranges is generally three- to four-fold higher than for the overall market. It is therefore difficult to see how in a market with a large number of auto dealers, any kind of sustainable rents could be achieved. Furthermore, it is impossible for us to understand how such a competitive market could be aided by vertical integration, and the Workshop panelists provided no evidence that would clearly illustrate any consumer benefits to ending current restrictions on auto manufacturers from selling directly to the public. Since there are clear and marked differences in economic power between dealers and manufacturers that can only be remedied through the action of state legislatures and these actions cause no quantifiable harm to consumers, what then is the economic justification for eliminating these duly enacted laws? 42 There certainly is no econo- metric evidence. Meanwhile, states receive the benefit of additional tax revenue and employment; other consumer and ancillary societal benefits are achieved; and an artifi- cially tilted playing field is leveled. Simply put, these laws serve the public interest.  NADA’s 2014 letter to the FTC providing them with much of the information that they were seeking in the 2016 workshop can be found at bit.ly/286w8oC. e nal installment of the NADA letter responding to the 2016 FTC hearing will be in the next issue of “Dealers’ Choice”.  NADA RESPONSE — CONTINUED FROM PAGE 29 39 Walden, Michael L. (2005) "Do Geographic Entry Restrictions Increase Car Prices?" The Review of Regional Studies 35(2) 231-245. 40 Rogers, R.P. (1986) “The Effect of State Entry Regulation on Retail Automobile Markets.” Bureau of Economics Staff Report. Federal Trade Commission: Washington, D.C. 41 Scott Morton, Fiona, Florian Zettelmeyer, and Jorge Silva-Risso (2011) “What Matters in a Price Negotiation: Evidence from the US Auto Retailing Industry,” Quantitative Marketing and Economics: 9:365-402. Ms. Keller highlighted this interesting conclusion from Professor Scott Morton’s research during panel three. TR. III; 18. 42 In this regard, Professor Carlton asked a very interesting question: “[w]hat is the evidence that consumers are harmed?” TR. III; 8. Clearly, he was questioning the need for franchise laws, yet we ask this same question: What is the evidence that consumers are harmed by dealer franchise laws?