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Why Intra-Brand Dealer Competition Is Irrelevant to the Price Effects of Tesla’s Vertical Integration

In recent years, Tesla Motors has been engaged in a state‐by‐state ground war for the right to distribute its all‐electric vehicles directly to consumers. The car dealers’ lobby, with the political backing of General Motors, has fiercely battled back, relying on decades‐old state dealer protection laws to argue that Tesla is legally bound to distribute through franchised dealers. Through a combination of favorable state legislative and judicial decisions, Tesla has won the right to distribute directly in many states, but remains categorically barred from direct distribution in important states like Michigan and Texas—and hence all direct distribution given its business model. While Tesla has taken the lead in fighting the issue, many other new entrants to the automobile market, such as Elio Motors, are closely watching the issue, hoping that Tesla’s success will free up access to the heavily regulated U.S. automobile market.

The dealer protection laws on which the dealers rely were explicitly instituted for the purpose of protecting them from exploitation by the Detroit Big Three (General Motors, Ford, and Chrysler), not for the purpose of protecting consumers. Today, however, many dealers are no longer mom‐and‐pop organizations but multi‐billion dollar enterprises and the automobile manufacturing market has become much more competitive than it was forty or fifty years ago. So the dealers have attempted to recast the state dealer protection laws as consumer protection laws, arguing that direct distribution is harmful to consumers.

This shift toward a consumer protection justification has met a significant roadblock: major pro‐consumer organizations, including the Federal Trade Commission, Consumer Federation of America, Consumer Action, and Consumers for Auto Reliability and Safety have taken the opposite view, arguing that direct distribution by manufacturers is good for consumer choice, price competition, and innovation, and that dealer protection laws are for the sole benefit of the car dealers. To boot, a strange coalition of bedfellows, including free market, environmentalist, pro‐technology, pro‐consumer, and pro‐competition organizations—including such unusual allies as the Sierra Club and the Koch Brothers—have come out in favor of direct distribution. Against this backdrop, the dealers’ consumer protection arguments seem increasingly self‐serving and illogical.

Nonetheless, the dealership lobby persists in arguing that forbidding consumers from choosing to buy directly from a manufacturer is pro‐consumer. Recently, the National Automobile Dealers Association (NADA) has begun to advance this argument more formally in economic policy papers it has commissioned for release by the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a Washington think tank. In short, NADA and the Phoenix Center argue that empirical evidence shows that consumer prices fall when intra‐brand dealer competition intensifies. It follows, argues the Phoenix Center, that the elimination of inter‐brand dealer competition altogether through manufacturer vertical integration would lead to higher prices to consumers. According to NADA and the Phoenix Center, this evidence supports state legislation prohibiting direct sales.

That argument is specious, and this essay rebuts it.