FTC Smacks Down Michigan For Trying To Ban Tesla Sales: Didn’t We Already Warn You About This?

A little over a year ago, we noted how nice (if somewhat surprising) it was to see the FTC take a stand for Tesla and its direct sales model. Just as states — generally under pressure from auto dealers who hate competing with Tesla — were starting to explore laws to ban Tesla from those states, the FTC noted that it felt many of these plans were designed to hold back competition and innovation and it was prepared to step in. A year ago, it said things like this:

Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries.

Shots fired. In response to this (and public outcry), New Jersey and some other states appeared to back down. But not Michigan, home to the big US automakers, who aren’t at all happy with this new upstart competitor from California. Last fall, Michigan passed a law that made it even more difficult for direct sales like Tesla. The FTC didn’t do anything specifically about that (yet), but there’s a new bill under discussion in Michigan that would carve out an exception to the new ban on direct sales of vehicles, but just for a new category called “autocycles,” such as those from Elio Motors. The FTC used this opportunity to question why there’s a ban on direct sales of vehicles in the first place.

In a letter commenting on the Michigan proposal, FTC staff supports the movement to allow for direct sales to consumers—not only Tesla or Elio, but for any company that decides to use that business model to distribute its products. Blanket prohibitions on direct manufacturer sales to consumers are an anomaly within the larger economy. Most manufacturers and suppliers in other industries make decisions about how to design their distribution systems based on their own business considerations, responding to consumer demand. Many manufacturers choose some combination of direct sales and sales through independent retailers. Typically, no government intervention is needed to augment or alter these competitive dynamics—the market polices inefficient, unresponsive, or otherwise inadequate distribution practices on its own. If the government does intervene, it should adopt restrictions that are clearly linked to specific policy objectives that the legislature believes warrant deviation from the beneficial pressures of competition, and should be no broader than necessary to achieve those objectives.

Opening the door by a crack is a step in the right direction, and we urge policymakers in Michigan to take this small step. But beyond company-specific fixes lies a much larger issue: who should decide how consumers shop for products they want to buy? Protecting dealers from abuses by manufacturers does not justify a blanket prohibition like that in the current Michigan law, which extends to all vehicle manufacturers, even those like Tesla and Elio who have no interest in entering into a franchise agreement with any dealer.

The full letter is below — and it does a nice point-by-point debunking of the laughable arguments by those who insist bans on direct sales to consumers are necessary. Here’s just a snippet:

Those who support a blanket prohibition on direct manufacturer sales have made a number of arguments that FTC staff find unpersuasive. Perhaps the central concern reflected in the current laws regulating the manufacturer-dealer relationship is that government intervention is required to protect independent dealers from abusive behavior by their suppliers. But a blanket prohibition of direct manufacturer sales is not a narrowly crafted provision to protect franchised dealers from abuse in their franchise relationships. Such a prohibition is categorical, going well beyond the many other statutory provisions that protect dealers from such abuse. It extends to every entity engaged in manufacturing, assembling, or distributing new motor vehicles, even a manufacturer that has never entered into a franchise agreement.

Advocates for existing dealers also argue that manufacturers that sell directly to consumers will not provide them with adequate service. This argument presupposes that automobile manufacturers in a competitive environment will act contrary to their economic self-interest. If consumers greatly value post-sale service and would be unlikely to purchase or recommend any automobile without a reasonable assurance of quality future service, then any manufacturer will have an incentive to supply such service or else see its sales decline to the benefit of its rivals. This competitive pressure is a strong motivation for manufacturers to either provide good service themselves or continue to contract with an independent service provider, such as a dealer, to do so.

Finally, advocates for a categorical ban on direct sales argue that direct-selling manufacturers would charge higher prices to consumers. In their view, consumers benefit from the “intrabrand” competition between dealers of the same brand of vehicle. In other words, rival dealers in the same area that sell the same make and model of car compete for business and competition between them can lower prices for car buyers. Manufacturers, they maintain, would not be subject to the same competitive pressures.

This view is inconsistent with modern economic learning and with the Supreme Court’s widely accepted observation that strong “interbrand” competition—competition between rival manufacturers—can suffice as a source of downward pressure on price. Manufacturers in a competitive market face acute pressure to keep prices low to keep buyers from shifting their purchases to a competing manufacturer’s product. Thus, forcing firms to use inefficient distribution methods can result in higher prices and other forms of consumer harm. As described above, this is not merely a theoretical possibility. Statistical evidence shows that states that have placed strong limitations on gasoline refiners’ ability to operate their own retail outlets tend to have higher prices than those that allow refiners to use whatever combination of dealer and company-operated stations they prefer.

A continuing ban on direct sales by manufacturers perpetuates the current closed system of motor vehicle sales in Michigan. The system limits competition among existing, well-established manufacturers, all of whom must sell through the established network of independent auto dealers. A direct sales ban deters experimentation with new and different methods of sales by current auto manufacturers, and also by future entrants to the market. Michigan’s consumers are paying the price of such a dictate. The essential mechanism that drives markets—the interaction between the supply by manufacturers and the demands of consumers—is being curbed. The market is less responsive to consumer preferences and less innovative in anticipating their evolving needs.

It’s nice to see the FTC continuing to monitor this situation and to speak out against clearly anti-competitive moves.

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