Why can’t we buy cars the way we buy computers? Because state laws prohibit that.
The state performs many functions we need and appreciate, such as police and fire protection. Less appreciated are the laws that take money from the pocket of one citizen (Peter) and transfer it the pocket of another (Paul). The purpose of these laws is not to provide a safety net for the poor; it is to provide welfare for the rich. A prime example is the law prohibiting competition in the purchase of new cars. The purpose of the law is to shift money from the middle class to auto franchise dealers, who tend to be far richer.
Most states require car manufacturers to sell through dealers. Even if you order directly from the factory, the order must go through the car dealer. This expensive dealer distribution system adds about 30% to the cost of cars.
Until 1984, people bought home computers the way they buy cars, through retail dealers like Best Buy. Then, a 19-year-old named Michael Dell offered to sell computers directly to the public, by mail order. His recipe for success: build the computer exactly to the customer’s specifications, after the customer orders it; cut out the middleman and dramatically cut the price.
In 1985, Dell’s first year in operation, his company grossed more than $73 million. Now, many people buy their computers directly from the manufacturer, while others who prefer a different shopping experience buy from a local computer store. Computer prices have dropped dramatically, and Dell is a multi-billion dollar company.
Why can’t we buy cars that way? It’s difficult to find a new car that costs less than $25,000 or $30,000. A luxury car is over $100,000. For prices like that, you would think that customers get exactly the car they want. Not so. While people can order exactly the type of computer they want, their choices for cars are, in practice, much more limited, because the car dealer is anxious to move out of the lot those cars already there. All those cars just resting comfortably on the lot are the dealer’s inventory and the interest on that inventory costs the dealer money.
The car’s costs include not only the salesperson’s commission, but also fixed costs connected to the physical location, such as property tax, utilities, maintenance on the showroom, and so forth. Whether the dealer sells one car or no cars that month, those fixed costs continue. These costs are baked into the price of the car.
Car manufacturers build cars before anyone orders one, so they are approximating what they think the public might want. When they guess wrong, we see rebates at the end of the model year for the less popular models. The car manufacturers may sell these unpopular cars at a loss, because that is the best price they can get. Part of the cost of every car is the cost to the manufacturer of guessing incorrectly what the public might prefer and how tastes may change.
Tesla is one of several new car manufacturers trying to become the Dell Computer of car sales. In some states like California, you can walk into a small Tesla showroom. This storefront often displays only about two Tesla cars and a Tesla chassis, so you can see what is under the hood. (By the way, not much is under the hood; it looks like a giant cell phone on wheels — no pistons, no transmission, no fan, no oil, almost no moving parts.)
If you want a test drive, a salesperson (salaried, not on commission) will arrange one. If you want to buy a car, you go to the Web. The showroom will have a computer you could use, or you could use your home computer). You will order exactly what you want. Only then will Tesla start building your car. It arrives a month or two later (depending on the model). For several weeks after you order, you can change your mind. Try doing that a week (or a day) after you drive your car from the dealer’s lot.
In other states, the Tesla method of selling cars is illegal. If a Tesla employee simply tells a customer the truth—how the customer can order a car using the Web—that’s illegal. If the employee tells the prospective purchaser that he could cross the state line and travel to another state (one that does not force purchasers to buy from car dealers), that’s illegal too.
Lobbyists for car dealers and other interested groups are fighting to keep or expand the present system. Rather than trying to change the laws in each state, a promising alternative is constitutional litigation. As Alexis de Tocqueville noted in 1831, “in no country are the judges so powerful,” or lawyers so important. What was true then is still very true today.
One might think that challenging laws that impose economic restrictions is a loser’s game. Law schools consistently teach that courts since 1937 do not invalidate economic legislation, unless the legislation is “irrational,” and nothing is irrational. Yet, there are important exceptions to this general rule.
For example, in Granholm v. Heald the U.S. Supreme Court invalidated a Michigan law that prohibited out-of-state wineries from shipping wine directly to in-state consumers. The purpose of the law (to help in-state dealers) was economic protectionism and that violated the commerce clause. In Metropolitan Life Ins. Co. v. Ward, the Court invalidated an Alabama law that taxed out-of-state insurance companies at a higher rate than domestic insurance companies to promote domestic business within Alabama. This economic discrimination violated the Equal Protection Clause. Both of these cases do not bode well for states protecting their car dealers from competition.
There is also the question of free speech. States have tried to ban pharmacists from advertising prices of prescription drugs. The purpose of such laws was to make it more difficult for consumers to compare prices and thus help small pharmacists compete with larger chains, who charged less. On the 200th anniversary of our Declaration of Independence, the Court ruled in Virginia Pharmacy Board v. Virginia Citizens Consumer Council that it violates free speech to prevent truthful publication of drug prices. A law that makes it illegal for Tesla sales staff to tell the truth about ordering from the Web violates free speech.
Lower federal courts have also invalidated economic protection laws as “irrational.” Craigmiles v. Giles held that a law that allowed only licensed funeral directors to sell caskets in the state is “irrational.” Brown v. Barry held there was no rational basis for prohibiting shoe shine stands, but not other businesses, from operating in public.
Tesla’s quandary offers an excellent opportunity for the state and federal courts to invalidate laws that exist only to favor entrenched economic interests. Yes, that may unleash a price war, but no consumer was ever wounded in a price war.
Actually, Gateway was selling direct to consumers before Dell figured out how to do it and actually make money doing it.
I tend to believe that most ‘consumer protection’ laws are for economic, not consumer, protection (as is the restrictions on car purchases). But I see a problem for arch-federalists like myself. Removing state economic regulations to create a more national market place seems to have the unintended consequences of shifting regulatory power to the national government – I’m mostly thinking of the idea of tearing down state laws re: medical insurance. Consumers seeking redress from out of state insurance companies (or online car sales) would have to seek redress in federal court – and ultimately federal regulation. Just pausing to ponder – no question of it not being commerce (at least for cars) but…..
Rotunda was my con law prof many decades ago. He still does a good job of explaining things. And you can’t tell it from his writings but he has a wicked sense of humor.
Beepi is revolutionizing how cars are sold (in California). I bought a car online (with credit cards) from them and it was the most amazing, wonderful experience. They understated mileage and dings- did the DMV paperwork, delivered it with a bow, I got to keep it for two weeks and return no questions asked, but of course I was already in love with my new car and the Beepi company.
Free speech is exactly what I thought of when I read the portion about prohibiting dealers from telling customers of better deals elsewhere. Thank you for the read! I always appreciate your work.