Franchise Laws of the Automaker Apocalypse

Imagine for a moment that television studios by law had to continue making shows they would normally cancel. Or fast food chains had to make menu items that few people buy. Imagine we still lived in a world of New Coke, Arch Deluxe, and Cavemen. Well wake up because when it comes to cars, that's the world we live in.

As Mike Munger and Russ Roberts discuss in the latest EconTalk, car franchises long ago lobbied local governments to pass laws handing dealers a string of advantages over the corporate office. In the vast majority of states, two dealers can't sell the same model within fifty miles of each other (stories that the franchises are too densely packed aren't true), corporate must make a strong effort to advertise each brand, only dealers can unilaterally terminate the dealership agreement (unless the dealer does a very poor job selling), and corporate must keep supplying the dealership with a minimum number of cars. Dealerships did this because each franchise is based around one model of car. But it also means that any model GM, Chrysler, or Ford make is a model they can never get rid of (though they can re-imagine it).

There's lots of problems the American automobile industry has (and the podcast goes into more detail) but I found these laws most shocking. They also explain a lot (such as why foreign makers focus on a few good brands). Paradoxically, it was the domestic dealers that brought down the Big Three; the only way out of these dead-end dealerships is bankruptcy.