January 19, 2015

Laws Protecting Auto Franchises Are Bad for Consumers and Innovation

Jerry Ellig

Research Professor, George Washington University Regulatory Studies Center
Summary

U.S. automobile sales at the end of 2014 hit their highest level since the first quarter of 2006, according to data compiled from industry analysis source Wards Auto. While auto sales have climbed back to pre-recession levels, another aspect of the industry has continued to expand as well: The number of laws that protect auto dealers from competition.

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U.S. automobile sales at the end of 2014 hit their highest level since the first quarter of 2006, according to data compiled from industry analysis source Wards Auto. While auto sales have climbed back to pre-recession levels, another aspect of the industry has continued to expand as well: The number of laws that protect auto dealers from competition.

Almost every state regulates three aspects of auto dealer franchising. These regulations: prohibit manufacturers from terminating franchises with existing dealers unless they prove they have a “good cause” to do so, require auto manufacturers to sell new cars through franchised dealers, and protect dealers from competition by awarding exclusive territories. In 1979, fewer than half of the states regulated all three of these aspects of auto dealer franchising. Today, every state regulates all three of these aspects with the exception of Maryland, the only state which does not force manufacturers to give dealers exclusive territories.

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