Direct to Consumers: The Solution to the Inefficiencies of Auto Dealer Regulation

Abstract

The automotive industry is one of the last remaining manufacturing industries in the United States. Since the early 20th century, manufacturers have sold vehicles through independent automobile dealerships. When the manufacturers began to take advantage of their dealerships, the state and federal legislatures stepped in and adopted regulations that gave dealers specific sales territories, protected them from being terminated without "good cause," and required them to be licensed, among other regulations. Later in the 20th century, the regulations began to hinder the manufacturers by keeping them from tailoring their dealer networks to the consumers. The domestic manufacturers, which have had established dealer networks in the United States since the early 20th century, were at a severe disadvantage compared to the more recent foreign manufacturers, who were able to create their dealer networks to have greater economies of scale by tailoring them to work with the regulations that were already in place. The author suggests that manufacturers semi-vertically integrate the sales process of dealerships, so that they will be able to sell vehicles directly to their consumers. This will allow manufactures to produce the vehicles that match consumers' preferences and budget constraints, without having the double monopoly markup that is associated with the current dealership-manufacturer relationship. Additionally, the domestic manufacturers would be able to experience equal economies of scale to their foreign rivals. The new model will benefit not only the manufacturer and the consumer, but potentially the dealership, as well