September 11, 2005
North Carolina consumers may be hurt by an obsolete state law that protects new-car dealers, according to a new analysis published by the John Locke Foundation.
Daren Bakst, legal and regulatory policy analyst at the Raleigh-based think tank, wrote a new Spotlight briefing paper on what is known as a “relevant market area” (RMA) law, a critical provision in North Carolina’s motor-vehicle franchise laws that was amended this year.
The RMA law, which was enacted in 1983, limits the creation and relocation of new-car dealerships, Bakst explained. Generally, under the law, a dealership cannot automatically be created or relocated within a certain distance of another dealer of the same make of car.
“If I wanted to open up a car dealership, I may find it to be impossible, not because of a business reason, but because the state may prohibit me from opening up the dealership,” Bakst said.
As far back as the 1930’s, state laws have been on the books to regulate the relationship between car dealers and car manufacturers. North Carolina’s law regulating this relationship dates back to 1955. Bakst stated that these laws were enacted to protect, in part, dealers who were thought to have unequal bargaining power with manufacturers since a handful of manufacturers produced most of the cars sold in the United States.
Bakst asserts that the RMA law is obsolete, given the drastic changes in the car market over the past decades. An increase in competition between manufacturers, a reduction in the number of car dealers, and a strengthening of individual dealers have made for a completely different and dynamic marketplace in the 21st century, he argued.
“Market conditions change and laws need to reflect those changes. The RMA law was created because of a market that existed over 50 years ago,” Bakst said.
He also documented research that has consistently shown that RMA laws hurt consumers by increasing prices. Bakst pointed to a Federal Trade Commission study that concluded that average car prices were 6.14 percent higher in states with RMA laws. In fast-growing areas such as North Carolina, he stated, prices were 7.63 percent higher.
“The RMA law does not just affect dealers and manufacturers,” Bakst concluded. “When the free market is not allowed to operate, as is the case with the RMA law, consumers get hurt by having to pay higher prices.”
Daren Bakst’s Spotlight, “Auto Dealer Protectionism,” is available on the John Locke Foundation website. For more information, contact Bakst ([email protected]) or Summer Hood ([email protected]) at (919) 828-3876.