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Cato Study Calls Auto-Franchise Laws 'Protectionist,' 'Unconstitutional'

26 July 2000

    WASHINGTON - Car dealers hate the idea of Ford and GM selling automobiles 
directly to consumers over the Internet.  But from the consumer's point of view, 
"restrictions on Internet auto sales look like another way to deny them choice 
and cost savings," according to a new study from the Cato Institute.

    Car dealers themselves are free to sell automobiles over the Internet,
says Solveig Singleton, Cato's director of information studies.  Car
manufacturers, by contrast, are barred by franchise laws in many states from
making Internet sales.  (On July 13 the Alliance of Automobile Manufacturers
sued the state of Arizona on grounds that its new dealer-franchise law is
unconstitutional.)

    Franchise laws protect consumers from the automakers, car dealers say, but
Singleton dismisses that claim.  "Laws that 'protect' consumers are likely to
do more harm than good when they restrict competition," she says.  "There's a
big difference between a lemon law, which provides a remedy for a close
cousin of fraud, and a law that blocks certain sellers from making honest
deals over the Internet."

    Nor does Singleton think that car dealers are entitled to protect their
customer base from competition.  "Car dealerships do not 'own' their
customers," she says.  "Those customers have a right to buy elsewhere if they
so choose."  Besides, car dealers concerned about losing market share can't
rely on protectionist laws to escape the changes the Internet is forcing on
the economy.  "The most successful businesses will be those that respond to
market forces most quickly, not those that use legal barriers to turn
themselves into dinosaurs," she says.

    Restrictive auto franchise laws also run afoul of the Constitution,
according to Singleton.  Efforts to limit the automakers from advertising
online clearly infringe free-speech rights, she says, while laws to protect
local dealers from out-of-state competition violate the commerce clause.

    The good news, relatively speaking, is that "government support for
restricting online auto sales to local dealers seems unlikely -- except,
oddly, from the state regulators and legislators enjoying the closest
relationship with automobile dealers' associations," Singleton concludes.

    Cato Briefing Paper no. 58 (http://www.cato.org/pubs/briefs/bp-058es.html)

   The Cato Institute is a nonpartisan public policy research foundation
dedicated to broadening policy debate consistent with the traditional
American principles of individual liberty, limited government, free markets,
and peace.