Document Type

Article

Publication Date

1-2016

Abstract

Public choice theory has long proclaimed that business interests can capture regulatory processes to generate economic rents at the expense of consumers. Such political exploitation may go unnoticed and unchallenged for long time periods because, though the rents are captured by a relatively small number of individuals or firms, the costs are widely diffused over a large number of consumers. The triggering event to expose and mobilize opposition to the regulatory capture may not arise until a new technology seeks to challenge the incumbent technology, thus creating a motivated champion to expose and oppose the regulatory capture and advocate for regulatory liberalization. That moment has arrived in the automobile industry. Since the 1950s, the distribution of automobiles has been pervasively regulated by a patchwork of state laws promulgated at the insistence of dealers for the ostensible purpose of preventing unfair exploitation by franchising car manufacturers. Among other things, the dealer laws in many states prohibit a manufacturer from opening its own showrooms or service centers-from dealing directly with consumers. At the time these direct distribution prohibitions were enacted, the Big Three auto manufacturers (Ford, General Motors, and Chrysler) completely dominated the U.S. car market, and the dealers argued that they were unable to contractually protect themselves against a franchising manufacturer unfairly undermining its own franchised dealers at retail. Though the U.S. auto market has become considerably more competitive since the direct distribution prohibitions were enacted, hence diminishing any power the manufacturers might have to impose draconian contractual terms, the laws have persisted largely without modification.

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