Monday, May 27, 2013

Do Tesla Buyers Need a Nanny (State)?

From Tarheel State to Nanny State?

As previously explained on this blog, government exists to protect and enhance the individual right to exercise one's faculties, including the faculty of creating and possessing property.  Moreover, this right necessarily includes the right to cooperate with others, including by market transactions embodied in private contracts.  By creating background rules of contract, property and tort law, for instance, the state can enhance the exercise of such faculties.  Such an institutional framework can facilitate the emergence of a thriving market economy based on specialization and continuous voluntary market transactions that presumably increase the welfare of parties to them.

The North Carolina Senate apparently has a different view of the appropriate role of the State.  Earlier this month that body passed a bill that, instead of protecting and enhancing the exercise of individual faculties, would coercively infringe those faculties in two different ways.  In particular, Senate Bill 327 would ban automobile manufacturers from communicating directly with customers for the purpose of selling automobiles to them.  The bill would also ban any such sale, whenever the seller sells five or more cars in any 12 month period.  According to published reports, threat of competition from Tesla Motors, which has taken the innovative approach of declining to sell cars to independent dealers or otherwise sell from a fixed location, prompted the North Carolina Automobile Dealers Association to support the bill.  (This article provides some additional detail about the controversy.)

Innocuously titled "An Act to Clarify the Motor Vehicle Dealers' and Manufacturers' Licensing Law," the bill would, if enacted into law, prohibit both certain communications between manufacturers and consumers and sales over the internet as follows:

First, North Carolina Law already requires all "Motor Vehicle Dealers" to be licensed by the state.

Second, North Carolina Law prohibits all such dealers from selling automobiles except at "an established showroom." 

Third, the bill expands the definition of "Motor Vehicle Dealer" to include any person that, "use[es] a computer" or "other communications facilities, hardware or equipment" located within North Carolina to "engage in the business of selling automobiles," and "transmitting applications, contracts, or orders" for motor vehicles purchased by consumers in the state, unless that person sells fewer than 5 such vehicles in any 12 month period.

Taken together, these provisions would ban any company from using the internet or, for that matter, old fashioned telephone calls, to sell five or more automobiles annually to willing purchasers on terms mutually agreeable to both parties.  Any such seller would constitute a "Motor Vehicle Dealer" selling automobiles from somewhere other than an "established showroom," contrary to North Carolina Law.

There are, of course, very good reasons that many consumers might rely upon independent dealers when shopping for a new or used car.   For instance, consumers might rely upon dealers to provide expertise and information that consumers lack or could only obtain at great expense.  Consumers might also rely upon a dealer's hard-earned reputation for trustworthiness when selecting a car that the dealer recommends.  Manufacturers, too, may, wish to rely upon independent dealers to distribute their products.  After all, such dealers possess the sort of local knowledge that a distant manufacturer might lack.  Moreover, because they are independent and take title to products they sell, dealers possess powerful incentives to discover and employ effective promotional strategies.  (See pp. 586-607 of this article for a detailed analysis of why manufacturers choose to rely upon independent dealers to distribute their goods.) 

However, reliance upon dealers, especially those that must have an "established showroom," entails costs as well, costs that consumers  must ultimately bear, given that the price of a product includes the cost of distribution.  It is thus no surprise that some consumers wish to purchase automobiles directly from the manufacturer, thereby avoiding the extra costs of reliance upon dealerships.  Nor is it surprising that a firm like Tesla might wish to avoid the expense associated with established dealers by dealing directly with consumers.

As previously explained on this blog, free societies enforce voluntary agreements between parties that are capable of understanding their own interests, so long as these agreements do not cause harm to third parties or result from force or fraud.  Application of this straightforward principle requires rejection of the sort of coercive interference with individual freedom that the Senate bill entails.  Sales arranged over the internet do not harm third parties, and North Carolina Law no doubt provides adequate remedies to individuals who are defrauded via internet sales or, for that matter, by local dealers.  Thus, the Senate Bill appears to be a form of economic protectionism that will enrich dealers  at the expense of consumers.  Such legislation will also protect manufacturers that rely upon a dealer system of distribution, by making market entry by Tesla and other new manufacturers more difficult.

Hopefully the North Carolina House of Representatives will decline to pass the Senate bill, thereby protecting the state's consumers from such coercive interference with their basic economic liberties.  If local dealerships really do provide the sort of services that justify their costs, then consumers will, despite Tesla'e entry, continue to flock to such dealers in droves, gladly paying the prices necessary to support the operation of such dealerships.  If not, then  such dealerships should go the way of other outmoded economic activities.  In short, consumers should be allowed to choose whether Tesla's innovative approach makes economic sense.   Government should not pick economic winners and losers.  The alternative exemplified by Senate Bill 327 is a form of Nanny Statism that stultifies society's dynamism and thwarts wealth creation and economic growth.

Sunday, May 19, 2013

Kansas Gets it Right on Minimum RPM


Embracing Economic Science
Kansas Governor Sam Brownback  recently signed legislation reforming the state's approach to minimum resale price maintenance ("minimum rpm"), thereby conforming the law to the dictates of modern economic science.  (The legislation appears here. An official summary appears here.)  The legislation in question amended the state's Restraint of Trade Act to make it clear that the Act only forbids unreasonable restraints of trade, thereby incorporating into Kansas law the sort of "Rule of Reason" that the U.S. Supreme Court read into Section 1 of the federal Sherman Act in Standard Oil v. United States, 221 U.S. 1 (1911). In so doing, the new statute nullfied the Kansas Supreme Court's recent decision in O'brien v. Leegin Creative Leather Products, 277 P.3d 1062 (Kansas 2012), which had held that the state's Restraint of Trade Act bans any and all minimum rpm agreements, regardless whether the contract is reasonable in a particular case.     
The O'brien decision would have made perfect sense as a matter of antitrust policy in, say, 1950.  At that time economists and others were hostile to so-called "non-standard contracts," that is, agreements that limited the autonomy of dealers and others who purchased and took title to a manufacturer's product.  This hostility followed naturally from the state of economic learning at the time. For, as previously explained on this blog, during this era economists and others believed that complete or partial vertical integration could serve only two purposes: first, the realization of technological efficiencies and second, the creation or exercise of market power, by depriving rivals of sources of inputs or otherwise stifling competition.  Because minimum rpm and other non-standard agreements reached across the boundaries of one firm to dictate decisions by other firms, sometimes in other states, such agreements could not produce technological efficiencies.  As a result, economists and others inferred that such agreements, which reduced rivalry, necessarily fortified or exercised market power to the detriment of society's consumers.  The result was the so-called "inhospitality tradition" of antitrust law.  (See pp. 68-80  of this article for a more detailed explanation of the origins of the inhospitality tradition.) 

In 1960, however, everything changed.  In a path-breaking article, Professor Lester Telser explained how minimum rpm could prevent a manufacturer's dealers from free-riding on each others' promotional expenditures, thereby overcoming the market failure that would result if each dealer was left to his or her own discretion when determining promotional tactics. See Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J. L. & Econ. 86 (1960).  Six years later, and as previously recounted on this blog, Robert Bork reiterated Telser's argument and extended Telser's reasoning to non-price vertical restraints such as market division as well as horizontal price and non-price restraints that are ancillary to otherwise legitimate joint ventures. See Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, part II, 75 Yale L. J. 373 (1966).  (See also here,  here, and here for this blogger's views on the appropriate characterization and treatment of such restraints)   

The Supreme Court eventually took these lessons to heart.  Thus, in 1977, the Court, citing Bork and others, overruled a prior decision that had banned non-price vertical restraints such as exclusive territories.   See Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977).  Two decades later, the Court, again citing Bork and others, overruled a previous decision condemning maximum rpm as unlawful per se. See State Oil v. Khan, 522 U.S. 3 (1997).  Finally, in Leegin Creative Leather Products v. PSKS, 551 U.S. (2007), the Court overruled Dr. Miles v. John D. Park & Sons, 220 U.S.373 (1911), which had banned minimum rpm outright.  Writing for the Court, Justice Kennedy persuasively explained that Dr. Miles was based upon an economic misconception, namely, that manufacturer-imposed minimum rpm is economically indistinguishable from a horizontal cartel among the dealers of a manufacturer's product.  Relying upon the work of Bork, Telser and others, Justice Kennedy explained that, instead, manufacturer-imposed minimum rpm often produces significant efficiencies, by, among other things, preventing free-riding and thus ensuring an optimal amount of promotional expenditures, with the result that per se condemnation of the practice is not justified.  In so doing, the Court followed Standard Oil's requirement that courts employ "reason" to adjust antitrust doctrine in light of "more accurate economic conceptions," that is, advances in economic science.

Of course, the Supreme Court's Leegin decision only governed the federal Sherman Act, which generally does not preempt more interventionist state antitrust regulation, no matter how ill-advised.  Thus, Leegin left states perfectly free to ban minimum rpm as unlawful per se under their own antitrust laws, as some have, thereby reducing the welfare of a state's consumers.  Perhaps Kansas law left the O'brien court with little choice but to reaffirm such a per se ban in 2012.  Be that as it may, the people of Kansas are fortunate to have a legislature apparently committed to conforming the state's antitrust law to the dictates of economic science.