Insider Dealing: Car Dealer Protectionism Run Amuck

Nov 13, 2019 | Blog | 0 comments

Imagine you wanted to open a restaurant. Imagine you were allowed to cook the food yourself, but you were prohibited by law from serving it to customers yourself; instead, you were forced to hire a waiter. Next, imagine that the waiter wasn’t pulling his weight, but you weren’t allowed to fire him unless you could prove you had good cause, and the people you had to prove it to were the waiters friends, who also happened to be employed as waiters. Finally, imagine that you had to get permission from the waiter before you could hire another waiter. If he refused, you could appeal his decision… to that same group of his waiter friends. Each of these imaginary scenarios is a close analogy to the very real laws that hinder the distribution of new cars.

Car manufacturers are not allowed to sell directly to consumers. They can make the vehicle, but then must hire dealers (a.k.a. waiters) to interact with consumers. These state-mandated middlemen will surely want a cut of each sale, making the price consumers pay higher than it might otherwise be.

Car dealers have powerful protections to keep themselves inserted firmly between makers and consumers. Once a dealer selects a franchisee to represent a particular area, the manufacturer must show good cause to revoke the franchise, even if the contract term has expired. It also includes the dealer’s heirs and whomever he wants to sell to. The manufacturer must have a good reason to remove a franchisee or to reject his chosen successor. And the people who second-guess the manufacturer’s decision are a commission of other car dealers in Oklahoma, who are protected by those same laws, and have a financial interest in making sure they are broadly enforced.

Dealers also enjoy exclusive territories. If a manufacturer wants to put a new dealership within 15 miles of an existing dealer of the same line-make, they must give notice to the existing dealer, who has the opportunity to object. When the dealer objects, the manufacturer can appeal. The appeal goes before the same commission composed of car dealers – still with a vested interest in making sure there aren’t too many dealers in the state. But here, instead of looking out for a fellow dealer in the hopes that someday he might do the same for them, the commissioners have an interest in keeping the number of dealers small. The scope of this conflict of interest will depend somewhat on where the commissioner/dealer is in relation to the proposed dealer and how closely they compete. For instance, a BMW dealer in Tulsa probably isn’t too worried about a Dodge dealer in Lawton. But there is still enormous potential for a commissioner to have a direct financial interest in keeping a new dealer out of his market. What happened to the idea that you can’t be the judge in your own case?

One more scenario: Imagine that when you go to buy a building for your restaurant, you are not allowed to hire a real estate agent. Even though you are a professional chef whose skills are in the culinary arts, not the art of the deal, you are legally prohibited from hiring a professional with expertise in buying real estate. Your only options are to negotiate yourself or bring in a friend willing to help you out for free.

This too is akin to what happens with car dealers. But this time it’s not the manufacturer on the other side of the table; it’s the buyer. It is illegal to accept payment to arrange a transaction involving a new car on behalf of someone else. And it’s not some slap on the wrist: the first offense is a misdemeanor that carries up to a $1000 fine and one year in jail, but if you’re convicted again, it’s a felony – for nothing more than helping someone arrange to buy a car.

There may not be a clearer example of naked protectionism in the laws of Oklahoma than the protection afforded to car dealers. But what is the legislature so afraid of? If their dealers are really so valuable, won’t people keep buying from them? And if people don’t want to buy from a dealer, why should the State of Oklahoma make them?

Mike Davis is the 1889 Institute Research Fellow. He can be reached at mdavis@1889institute.org.