[MichaelApproved]

"But the starting point, it seems to me, made sense."

It doesn't make sense to me. This could be handled with contracts, not laws. When signing a franchise with a factory, you stipulate that they can't enter your market or otherwise infringe on your territory by doing ___________.

It's a perfectly fine contract clause that unnecessarily turned into a law.

[Vivtek]

The problem is that during the initial phase of expansion into a virgin territory, it's in the franchisee's short-term interest to compete with other franchisees by omitting that clause. This is to the longer-term detriment of all franchisees.

If you consider that it's in the interest of society to promote a broader prosperity instead of repeated grassfires, then you pass this sort of law regulating commerce. Otherwise, you just end up with a patchwork of factory stores and bankrupt ex-franchisees, along with underserved regions of greater poverty.

The problem with the legislative solution is that all that code is undocumented, thus outliving its original purpose and unbalancing market systems two generations down the road.

[icebraining]

Why is the longer-term detriment and bankruptcy of franchisees worse for the broader prosperity of society? If the car manufacturers could undercut them if it weren't for these laws, aren't they just extracting potential customer surplus and transferring it to the franchisees?

And why would some regions be underserved? If they were profitable enough to open a franchise before, what would change?

[sophacles]

If you consider that a cornerstone of economics that a economic risk is rewarded when it turns out to have been a good idea, the actions of the dealers undermine the principle. The factory pawns the risk off to a franchisee, until it is shown that the risk is lower than they thought. Then they deprive the risk takers of the reward, or even the ability to pay off the financial burden of taking risk. It harms broader society by discouraging entrepreneurial activity - it stagnates the generation of new business because there is no chance of payoff to anyone who isn't an established player.

Essentially without the protections, the factories found a way to get the reward without the risk.

[icebraining]

That's only true if dealerships are a pure commodity, with no first-mover advantage or way for dealerships to differentiate themselves besides price. I'm fairly ignorant about the issue, but I find that idea extremely unlikely.

[rgbrenner]

A franchisee pays the manufacturer a license fee. They get a discount from the list price on the product, but that price is still higher than the manufacturing cost.

So consider what you're suggesting...

A manufacturer has costs of X, and will sell the good in the market for X + M (markup).

The franchisee will purchase the goods from the manufacturer and sell them for X + M + L(license fees per unit) + DM(dealer markup).

So while the manufacturer receives M + L for profits (and could match the dealer prices to receive as much as M + L + DM).. the franchisee receives only DM.

So what you're suggesting is that with the dealers lower profit margin, they could somehow provide better service than the manufacturer (that the manufacturer will not be able to match or exceed).

That is tough. Probably even impossible. Service costs money.

[MichaelApproved]

Regarding your last point, the undeserved areas aren't initially profitable. In the feared scenario, the franchisee spends money to develop that market, expecting to make a profit in the long run. The franchisee is taking a risk on this market. This law is meant to protect that risk and keep the dealer from jumping into the market after the franchisee spent their own money to develop it.

[cynicalkane]

You can s/ dealers and franchisees with just about any other field containing pioneers and establishments, which suggests to me the reasoning might not be sound.

Specifically, it just seems that historically franchisees made a bet they had a competitive advantage, and bet wrong. So they codified their position into law instead. Given the expense and scumbaggery of franchise car dealers, I think a lot of people feel the industry could use a "grassfire".

[Vivtek]

In this particular case, yeah, I think a grassfire is long overdue (like the California chaparral - suppress the fires long enough and you end up burning three counties at a time).

But there are times and places where fire prevention is considered a good thing.

[MichaelApproved]

"code is undocumented" great term to use for laws.

I see what you're saying about the interest of the society needing to step in to force the clause instead of relying on the two parties to include it. Can't say I agree yet but it's given me something to think about.

[boredguy8]

If you can't see why that makes sense, I'm concerned for you. You may disagree that it's the right approach, but to say it's not sensible strains credulity. (As to the idea that individual contractors were well-enough connected with each other to guard against the manufacturer's ability to screw them seems unlikely in 1930...but your foray into anarcho-syndicalism hardly seems the point of this thread, aye?)

[icebraining]

They weren't individual contractors, they were wealthy dealership owners, and the proof that they were well connected in their local communities is the effectiveness of their lobby, which created these restrictions in the first place.

http://www.econtalk.org/archives/2009/06/munger_on_franc.htm...