Barriers to Consumer Choice and Market Entry Hurt the Economy and Consumers

shutterstock_126145124Once in a great while at this blog, I write about other state legislatures doing something a bit crazy.  This is such a post and posits this question:  Why should any resident in any state be prohibited from buying a car directly from the manufacturer in another state?  I can think of no compelling reason for such a law.  To put it into constitutional law parlance, there is no rational basis, let alone a compelling state interest for this barrier to market entry and consumer choice.

But as the Washington Post reports, Left Coast innovative automaker, Tesla Motors, Inc., is facing this type of opposition from auto dealerships around the country who fret that a consumer might not visit their showrooms if they can purchase directly from a manufacturer.

Enter Tesla. The maker of innovative electric cars is hoping to be equally innovative in how it sells them. It wants something that closely resembles the Dell model to apply to its popular “Model S” sedan. The company is pushing the Texas legislature to change its own law to make it legal to sell Teslas there directly.

But North Carolina isn’t having any of it: Last week, a state Senate committee unanimously approved a bill to make the direct sale of autos in the state illegal.

What’s going on here is a battle of raw political power at the state level against the forces of markets.

Hats off to Tesla for its innovation in both its product and the means by which it seeks to sell its product to consumers. This precisely the type of ingenuity that will invigorate a sluggish economy.  The dealerships’ opposition to this innovation through barrier creating legislation is precisely what will keep our economy in the doldrums.  I will be curious to see if these state laws could pass constitutional scrutiny.

Thanks to loyal LCL reader, CH, for sending this article along.

Author: Kent Schmidt

As a Partner in the Southern California office, Kent practices in virtually all types of general business litigation, with an emphasis in unfair business practices, First Amendment litigation, defamation, trade secret litigation, class actions, product liability, securities litigation and enforcement, commercial disputes, employment law, intellectual property and Prop 65 (environmental) claims. He is an aggressive and creative courtroom advocate, representing both plaintiffs and defendants. Having spent his entire legal career at Dorsey, Kent is adept at finding the right lawyers in the firm to collaborate with in order to provide the best representation for his clients.

One thought on “Barriers to Consumer Choice and Market Entry Hurt the Economy and Consumers”

  1. I’m no expert on auto dealer franchise law, but I think this is a real issue in California as well. I believe manufacturers can sell directly to consumers but are not allowed to compete with existing franchisees in the franchisee’s territory. This probably doesn’t hurt Tesla, which is building a direct sales channel from scratch. But if the direct channel works out, other car makers will have a hard time competing, because they aren’t allowed to displace their established franchisees.

    Economically, this would help Tesla and hurt consumers. Since Tesla doesn’t have to compete with other manufacturers on a level field, it can pocket more of the savings generated by the direct sales channel. Letting other manufacturers compete through direct sales would push everyone’s prices down and benefit consumers.

    It’s great for California if Tesla succeeds and disrupts the traditional car market. But it’s even better for Californians if free competition reduces the price we pay for cars, whether they are made in Detroit or Freemont.

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