Auto dealers quash Internet competition

One of my favorite wisecracks is that all of my business friends love competition - for the other fellow. The responses of some companies to expanding Internet use sadly present a striking case in point of companies abhorring direct competition.

One example is the efforts of auto dealers to promote state laws making it illegal to buy cars directly through the Internet. Auto producers, of course, are free to engage in electronic commerce in selecting their suppliers, but consumers apparently need to be protected by "Big Brother."

In at least 44 states, car sales must go through an authorized dealer, even if ordered by Internet. This precludes direct manufacturer-to-consumer sales and ensures the dealer the "middleman" fee. State legislators who've passed these restrictive laws say cars are a safety issue and much more expensive than usual online products. That's apparent justification for "protecting" automobile purchasers from the low prices they could obtain by eliminating the middleman.

Estimates of the potential savings lost are in the range of $1,000 per vehicle, not to mention the time saved not having to visit a variety of dealers to find preferred options.

Some states have enacted rigid prohibitions. In Arizona, manufacturers may not even participate with their dealers in establishing Web sites that enable new-car buyers to obtain financing and other after-sales services, such as insurance and extended service plans. If a customer approaches a manufacturer directly, the company must provide the name to every dealer in the metropolitan area. That onerous amount of paperwork energizes auto producers to ensure buyers don't even approach them.

The ultimate consumer cost may far exceed $1,000. Auto dealer success in obtaining restrictions is an early warning to other industries where manufacturers are thinking about the Internet to sell directly to the consumer.

However, there is a special aspect of the auto industry that isn't universal in consumer products. Each auto dealer has invested substantially in obtaining and developing its franchise to sell products of a specific manufacturer - be it General Motors, Ford, Daimler-Chrysler, Toyota, etc. Correctly or not, dealers may believe they entered an implicit understanding that the manufacturer wouldn't compete against them. Of course, if that really were the case, there'd have been little need for the state laws, on auto sales; dealers could have gone to court.

Despite their protests to the contrary, when state legislators had to choose between supporting an organized business group or protecting the rights of consumers to make up their own minds, their choice was clear. In 44 cases, politicians opted for the special interest group. Ultimately, however, the efforts of car dealers - and others - to insulate themselves from competition may fail on legal grounds. If the federal courts hold that state restrictions impinge on interstate commerce, state laws could be held to be in violation of the Constitution's "Commerce Clause" which gives Congress power "to regulate Commerce with foreign Nations and among the several States."

I expect to buy my next car the conventional way with an authorized dealer. But the economic notion of consumer sovereignty and the legal protections of the Constitution say it should be my choice.

*Murray Weidenbaum is chairman of the Center for the Study of American Business at Washington University.

(c) Copyright 2000. The Christian Science Publishing Society