Auto dealership regulations unfair to competition and consumers

April 11th, 2003 by Leave a Comment

By Morgan Smith

Trudging from dealership to dealership to kick the tires on the new car you’re thinking about buying is nothing new for Georgians. Even in the facilitating age of the Internet, the Georgian whose heart is set on that Toyota Camry or VW Jetta still must do a lot of driving around town to check out dealers’ competing offers.

Ever wondered why?

It’s called “Relevant Market Area” or RMA. No matter how populated the area, whether it be crowded metro Atlanta or little Statesboro, Georgia’s established new-car dealers have wangled a little-known law that allows them to prevent any same-brand competitor from setting up shop within eight miles in any direction of an existing dealership. And if that means a buyer has to drive long distances between Volkswagen dealerships to check out the best deal, or a new car owner faces extra travel for dealer service and repairs . . . well, so what?

The state’s excessive RMA law is just one example of the need for Georgia to take a hard look at regulatory reform, a dry, convoluted process that consumers and businesses usually disregard until it’s too late. Too often, industry groups receive special protections from state regulations and franchise laws that are based on outdated or inaccurate assumptions. In these cases, the state needlessly provides significant economic benefits to a few industries – at the expense of a more competitive marketplace and better consumer choice.

As one example, the Georgia Public Policy Foundation’s examination of new car dealers highlights how state regulations can inadvertently hurt the consumer by insulating the retail auto industry from innovative new forms of competition. The Issue Analysis, “How New Car Dealers Put the Brakes on Competition,” is available at www.gppf.org.

The report reveals a rationale for state protections based largely on outdated perceptions about new car dealers. These laws largely ignore the realities of the modern auto marketplace. In fact, evidence clearly suggests that there is now less need for regulatory intervention in the new car market than ever before. This makes the recent adoption of even stricter protections for Georgia’s car dealers is especially suspect.

Since 1999, the state has allowed Georgia’s new car dealers to reap huge benefits from significant regulatory controls. In addition to strict RMA laws, Georgia dealers also benefit from rules that prohibit the sale of new cars through non-dealer outlets such as online services or manufacturer-direct programs. The dealers enjoying these protections are portrayed as small, local outlets that need state intervention to ward off “abuse” from large manufacturers. In reality, however, the historical imbalance between car dealers and suppliers has become just that – history.

The stereotypical view of the state’s vulnerable, small-town car dealers needs to be updated. To begin with, Georgia dealers are no longer exclusively bound to one brand of cars, which has significantly altered the relationship between dealers and manufacturers. In addition, the average dealer is now a very large operation, holding at least three franchises, sometimes at one location, at other times spread across the region. Consider Jasper Jeep Dodge Chrysler, which is billed as the world’s largest Jeep dealership. In 1975, it generated $210,000 in sales; in 1996, it reported sales of $165 million. On April 10, the dealership’s Web site listed 289 new cars and 69 used cars in its inventory.

While Jasper Jeep Dodge Chrysler may not be typical, even the average Georgia new car dealer now has sales of more than $35 million annually, according to the National Automobile Association’s 2002 Data Report. And increasingly, a good percentage of those sales are being made over the Internet. That trend, plus record average profits for U.S. dealers in 2001 of more than $600,000, should raise serious questions about whether there is good justification for laws that strengthen dealers’ economic protections at the expense of other competitors. In particular, it seems unfair and misguided to use state laws to lock out other online competitors, while allowing dealers to make good use of this channel themselves.

The forces at work in the auto industry are just one example of a potentially dangerous regulatory trend. The Washington-based Progressive Policy Institute has identified a wide range of sectors in which “disintermediated” groups – wholesalers and middlemen – are fighting to retain their monopoly over retail markets. As consumers become increasingly adept at directly purchasing items ranging from contact lenses to airline tickets to alcohol, the traditional middlemen in these industries are working aggressively to preserve their control over transactions. And for these groups, as with car dealers, a key weapon in the battle has been the effort to enact protectionist regulations at the state level.

There is nothing new about established groups feeling threatened by emerging forms of competition. When the automobile debuted, no doubt its most fervent critics were the buggy whip manufacturers and the railroad barons. Even so, the prospect of new competition is insufficient rationale for state government to intervene on behalf of one group at the expense of others.

Because regulation confers special benefits to specific groups, there should be a public consensus in such cases that state intervention is necessary and unavoidable. Once regulators and lawmakers step in, their restrictions must clearly address a specific policy goal, such as public safety. In addition, state regulations must be designed to minimize economic distortions and the negative impact caused for other groups.

Going forward, state officials should recognize that sound regulatory policy should be a flexible tool. Georgia’s regulations ought to adapt and change with the larger economic environment. If the conditions that brought special rules into place no longer exist, anti-competitive restraints should be diminished accordingly. If members of a particular industry are less at risk today than yesterday, their protections should be reduced. Lawmakers can begin by acknowledging that no industry, auto dealers included, faces the same challenges today as it did 70 years ago.

One complication for regulatory reform efforts is that entrenched industry groups, long insulated from competitive pressures, often build up disproportionate market power and political clout. Formerly “vulnerable” groups can find themselves in a position of increased political strength, and may use their close relationship with regulators to lobby for even stronger restraints. This can make it hard for state policymakers to be clear-minded about whether regulatory benefits have become overly generous. Not surprisingly, state officials who were questioned about opening up online auto sales cited concerns about Georgia’s lemon law coverage – but didn’t suggest the logical step of modernizing the lemon laws.

Georgia’s consumers and businesses should recognize that regulatory policy is a valuable economic tool. Certainly, the state must continue to provide safeguards for industries that have legitimate vulnerabilities. But state regulators must make it their business, too, to ensure that protections never outlive their need or create excessive benefits for certain groups. When conditions change for the beneficiaries of state policies, the regulatory framework should change as well. By making the regulatory system more dynamic and less stagnant, the welfare interests of all groups can be balanced and the state can preserve an open and competitive marketplace.


Morgan Smith is a freelance public policy analyst and an adjunct scholar with the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (April 11, 2003). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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Thank you for the great work that the Public Policy Foundation is doing across our state setting a wonderful example. I first ran for the Senate in 1994, and the Foundation was that resource I called upon to be a great help to me as we were articulating positions and formulating public policy initiatives. We appreciate very much your leadership and all that you stand for.

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