We live in an age of consumer empowerment, where a person can purchase virtually any product with a tap of the finger on an app. The decline in the role for ‘middle men’ between the consumer and the product has been seen across industries, from Amazon to Uber, and allows modern companies to dramatically decrease the overhead required to run their businesses.
Yet there is one gigantic industry that has been largely exempt from this disruptive innovation—the new car market.
When a person wants to purchase a new car, they are typically utilizing the same sort of system that has been in place since the 1930s. Similar to how franchising works in other businesses, car dealers—who are not part of the car company itself—are given an exclusive contract to sell cars of a particular brand in that area. But unlike the proliferation of McDonald’s restaurants or Kwik Trips that may appear on both sides of an off-ramp, dealership franchises are afforded broader swaths of territory.
The reasons behind the system date back to the unreliability and intense competition that characterized the early automotive market. Carmakers desired to expand their reach rapidly, and local franchising provided them an opportunity to grow their customer base quickly with a relatively low investment. Moreover, early cars were far more prone to breakdowns than they are today. Dealerships provided carmakers with the ability to guarantee local repair, and provided the consumer with peace of mind.
Over time, car dealerships became both politically powerful and an important source of tax revenue for local governments. Thus, laws were put in place to protect their interests. Wisconsin was no exception. In this state, consumers can only legally purchase new vehicles from a licensed car dealer.
But, shockingly, times have changed since the 1930s. The marketplace for vehicles is characterized, largely, by a few behemoth companies rather than a large number of small startups. And there is a mechanic on every corner that can handle most repair needs. A 2009 study by the Department of Justice found that the dealership system adds 6 to 9 percent to the cost of new cars, directly hurting in the pocketbook while decreasing the consumer’s ability to customize a car that most fits their needs.
Now, a new car company hopes to disrupt the existing dealership model in a manner similar to Uber or Amazon. Tesla is a carmaker based in California that sells electric cars*. They want to circumvent the existing dealership system and sell their cars directly to consumers. Legislation sponsored by Sen. Chris Kapenga, R-Delafield, endeavors to allow that. As described in the Milwaukee Journal Sentinel, this bill would create a carve-out for electric car companies like Tesla to engage in direct sales.
Not surprisingly, the entrenched interest that have profited under the dealership model are not happy. They point to concerns about the impact on the local economy, or that sellers of Teslas will have an advantage over traditional dealers.
Of course, these are similar arguments to those that have been used regarding other aspects of the economy, such as retail. But there is growing evidence that the decline of brick-and-mortar retailers has been accompanied by a rise in other, better paying jobs. There is no reason to think that changes to the car dealership model would be an exception to this pattern.
Kapenga’s bill represents a step in the right direction, though more dramatic reform of the existing system ought to be considered. The accusation that new legislation would provide Tesla with an unfair advantage is perhaps justifiable. But rather than an excuse to make no changes at all, it is high time to consider repealing laws that give dealerships monopolies in the new car market. Car dealerships have largely been spared from the pro-consumer disruption of the information age. That needs to change.
*We shouldn’t ignore that Tesla has its own problems with free market principles, as the recipient of large subsidies on every car sold.