FTC Staff Comment to the Hon. Dick. Posthumus Concerning Michigan H.B. 4390 to Prohibit Auto Brokering

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t:l"lTED :-:-ATES OF Al.~rr.I:::A
FEDERAL TKADE CO~,~MlSSION
( ~r:\'EU..>';D REGIOl\AL OFFICE
COMMISSION 	AUTHORIZED
September 	28, 	1988
\JS .. j(j~)~)
The 	Honorable 	Dick 	Posthumus
The 	Sem'.te
statG 	of 	Michi;an
S't;1te 	Capitol
Lansing, 	Michigan 	48913
Dear 	Senator 	Posthumus:
The 	staff 	of 	the 	Federal 	Trade 	C~nmission is 	pleased 	to
respond 	to 	your 	invitation 	to 	COmrr:€-:l't 	on 	t:-,8 	Sen,:~te ~ubstitute
f~r House 	Bill 	4390 	(S-G).l 	This 	bill 	wocl~ amend 	Section 	240 	o~
t~e Michigan 	vehicle 	Code 	to 	pro~ibi~ the 	business 	of 	automobile
brokering. 	We 	believe 	that 	the 	proposed 	prohibition 	of 	auto
brokering 	is 	likely 	to 	limit 	competition 	~nd 	injure 	c~n5umers.
I. 	Federal 	Trade 	Co~ission Experience
T~e 	FTC 	is 	an 	independent 	regulatory 	agency 	responsible 	for
fostering 	co~petition and 	safeguarding 	the 	interests 	of
c~nSU~8rs. 	The 	staff 	of 	the 	FTC, 	u~~n request 	by 	federal, 	state
and 	local 	governnental 	bodies, 	re~~lar~y analyzes 	legislative 	an~
regulatory 	proposals 	to 	identify 	~rovisions that 	m~y 	impair
competition 	or 	increase 	costs 	~it~ou~ offering 	offsetting
benefits 	to 	eonSU~8rs. 	Section 	5 	of 	~~e Federal 	Trade
Commiss ::-on 	Ac": 2 	p~~':Jhibi ts 	unfair 	metho::is 	of 	cc:;;;>et i tion 	end
unfair 	C~ d~ceptive acts 	or 	?ractiees. 	By 	e~~crcing 	thi~
statut~, 	the 	staf: 	has 	gain..::.::' 	sUbstuntL:.::' 	e}:p€:rienee 	in 	analyzing
the 	effects 	of 	various 	trade 	restraints, 	and 	the 	cost~ 	a~d
benefits 	of 	such 	restraints 	to 	consumers.
1 	These 	cor.~ents are 	the 	views 	of 	the 	staf~ ot 	the 	Cleveland
Re~~onal Office 	and 	t~e 	Bureau 	of 	Ec~~~~;ics of 	the 	Fe~er~l Trase
Ccr..:-:1iss ion. 	':'hey 	are 	not 	!ieee.s 3<:.ri::.. y 	the 	ViEWS 	of 	the 	Cc::uniss 10:1
or 	any 	individua.l 	COTn",~.'.ssione:::-.
2 	l~ 	U.S.C. 	Gee. 	45.

-:... '- :-
The 	Honorable 	Dick 	Posthu~~s
Scpte~er 28, 	1980
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2
5
6
Moreover, 	durin; 	recent 	years, 	th~s agency 	has 	bee!. 	act~vGlj
involved 	in 	issues 	r~lating to 	the 	retail 	market 	for 	auto~ob~les.
In 	'S[J4, 	the 	Com~iss':':>r. issued 	the 	Uhed 	l'~otor VehiclA 	Trt.l.U8
Requlat.i:.n 	Rule 	in 	em 	effort 	to 	educate 	consumers 	about 	the':'::-
Harranty 	rig!1ts 	and 	to 	prevent 	::.he 	injury 	that 	can 	be 	c,,'-1sec 	by
oral 	misrepresentation 	in 	used 	car 	transactions. 3 	More
recently, 	~ 	study 	~'Y t: '3 	rTC' s 	Bureau 	of 	Economics 	conclt;ded
that 	ent~y laws 	re~tricting th0 	number 	of 	automobile 	dealers 	in
an 	area 	may 	increl:sc 	costs 	to 	car 	buyers 	In 	this 	ccun~ry by 	a;;;
much 	as 	$3 	billion 	each 	year. 4 	Finally, 	during 	tne 	ldst 	two
ye:,r8, 	the 	staff 	has 	submi tt.':d 	comments 	te; 	oth~r states 	on 	issues
somewhat 	similar 	to 	those 	raised 	by 	this 	bill.~
II. 	~IDendmcnts to 	SeGtion 	248 	Re~tr,njn competition
The 	propoged 	amendments 	to 	section 	248 	prohibit 	the
brokering 	of 	automobiles 	within 	the 	s~ate of 	Michigan 	by 	limiting
tLc 	sale 	of 	new 	automobiles 	to 	licensed 	auctioneers 	and 	:-:12".' 	car
dea1ers. 6 	The 	pur~:>se of 	these 	amendments 	is 	to 	protect 	dealers
wj.th 	substantial 	investment 	in 	physical 	plants 	and 	facilities
from 	competition 	by 	brokers 	with 	little 	investment 	in
facilities. 7 	We 	believe 	that 	the 	amendments 	could 	reduce
competition, 	retard 	innovation, 	and 	injure 	consumers 	by
3 	16 	C.F.R. 	Sec. 	455.
4 	R. 	Rogers, 	Effect 	of 	State 	Entry 	Regulr;tions 	OD 	Petall
Automobile 	MarKets, 	Federal 	:~ace Commission, 	Bureau 	of 	Economics
Staff 	Reporc 	(1986).
~ 	letter 	from 	~he 	FTC 	staff 	to 	The 	Hono::-able 	Gwen
Me~~olis, 	Florida 	Senate 	(Mar~h 29, 	1988); 	letter 	from 	th~ FTC
staff 	to 	The 	Honorable 	David 	C. 	Waldrop, 	Jr., 	South 	Carolina
House 	0: 	Repr~sen~atives 	(Ma::-ch 	21, 	1988); 	letter 	:rom 	the 	FTC
s·.:.aff 	to 	T:J.e 	rion,.~-:;.ble 	?:ichard 	Katz, 	c:::lifornia 	State 	Asserr.b::':·
(January 	29, 	1988;; 	let~er from 	the 	F~C staff 	to 	The 	R~norable
William 	P. 	Clements, 	Governor 	of 	Texas 	(June 	1, 	1~87); 	let~er
from 	the 	FTC 	staff 	to 	The 	Honorable 	vioods 	Eowman, 	Illi~ois ~ouse
0: 	Representatives 	(April 	24, 	19E7).
Sect~on ..; 	of 	t~le bill 	defines 	"broker" 	as 	"a 	person 	",'ho
fc~' 	a 	cDnside~etic~ 	negotiates 	or 	attempts 	to 	nego~i~te the 	s~le,
exchange, 	or 	purchase 	of 	2. 	vehi -~le of 	a 	type 	required 	to 	be
titled 	u~der this 	act, 	to 	~hi~h ~~ 	or 	she 	does 	not 	have 	title 	0::-
ether 	1e:;:.1 	i~te~es-:', and 	....·ho 	does 	not 	display 	vehicles 	for
sale."
7 	X. 	Delonq, 	An 	Analysis 	e~ 	HE 	~~90 	(S-~) 	P~e~2rec 	fc~
!.:~ --:.isa~ 	"';e:la~t: I. 	?.e:··..:~lica~ Laj;::;:.-::'ty 	(~unL. 	~:., 	F 	:::(.).

T~o 	Honorable 	Di.c}: 	Pos~h~mus
September 	28, 	1988
ent::-enchi:1g 	(me 	grot;p 	of 	:-:.lsiness 	ov:nel:"S 	ut 	the 	expense 	cf 	ne·.·,'
~ntrants.
As 	a 	t :1rcchold 	matter, 	restrict.ions 	on 	bro}:er 1n9 	rdght 	:;e
reasonable 	it 	a 	significa~~ 	nu~be~ 	of 	ca~ buyers 	a~e 	identi~ying
the 	p:'rticular 	cnrs 	they 	\·la:lt 	to 	bUy 	b':' 	t~king 	advantage 	of 	thc!
f:\cil_ ti€-s 	and 	servic" s 	offered 	by 	full-~·<rv.i.co 	dcale:::-s 	but 	thc;n
r 	:::'chnsing 	t.heir 	ca::s 	through 	lO\\'-overhead 	,-'iutomobile 	bro}:e:-s.
Restrictions 	on 	such 	practices, 	however, 	need 	not 	be 	i~posed by
the 	state. 	Contractucl 	non-price 	provisions 	between 	dealers 	and
manufacturers 	c0uld 	address 	the 	problem. 	Theso 	provisions, 	if
properly 	drafted, 	f~:ould not 	rvisl 	antitrust 	concern~.8 	State
~.. egul a tion, 	ther" fore, 	would 	ncr. 	be 	required.
J
several 	organizations 	have 	embraced 	automobile 	brokering 	as
an 	innovative 	and 	cost 	effective 	way 	of 	~uy~ng and 	selling
automobiles. 	FoY.' 	example, 	A.."'n\vay 	Au":.o 	network 	sells 	options
which 	consumers 	may 	eX8rcise 	to 	purchase 	General 	Motors, 	Ford 	or
Chry"ler 	~utomobiles at 	prices 	guaranteed 	not 	to 	exceed 	$150 	ever
factory 	invoice 	price. 	Accorsing 	to 	Amway 	Corporatio;l, 	this
option 	costs 	S2~.95 a 	year, 	a~d may 	be 	exercised 	at 	any 	c~ more
than 	one 	hundred 	(100) 	automotile 	dealers 	in 	Xichiga~. 	I~ 	also
is 	available 	in 	more 	than 	twen:../-five 	(25) 	other 	st~tes 2.Ld 	the
District 	of 	Columbia. 	The 	American 	Automobile 	Association 	wor}:s
with 	selected 	auto~obile dealers 	througho~~ the 	country 	to
provide 	its 	members 	wit~ oppor":.unities 	to 	purchase 	new 	motor
vehicles 	at 	substantial 	discounts. 0 	Anv 	remune:::-ation 	could 	m~ke
AAA 	an 	automobile 	broker 	subject 	to 	pen~lt:8s fo:::- 	violating
~mended Section 	248. 	This 	is 	true 	evsn 	though 	~AA will 	have
done 	nothing 	~ore than 	undertake 	t~e hagqling 	over 	price 	t~at
inti~idate8 many 	car 	buyers. 	Limiting 	or 	discouraging 	th~se
methods 	is 	likely 	to 	af=ect 	~onsumers adversely.
Some 	trade 	associ~tions believe 	that 	the 	anend~e~ts to
Section 	:::48 	could 	also 	restrai -: 	conpstition 	in 	the 	us~d car
i 0 	'
~~rket.- 	The 	usual 	pract~ce of 	fleet 	owners, 	such 	as 	Hertz 	~~d
Avis, ,is 	to 	hold 	used 	car 	saleE 	on 	credit 	union 	prcpe:::-ty 	or 	in
shcF:~::..:-;g -::8:,'_,-r 	par}:ins 	10:"s. 	These 	sales 	er.":ail 	low 	overhead ,
a~.:5. ::: ~ ee":. 	owne:::-s 	freq-..lentl y 	pass 	along 	subst.:~nt:ial say ings 	tc
8 	~;~r example, 	mer.~fac":.~re:::-s mis~t restr~ct distribution
cf 	t~2 	prct~ct to 	places 	~~th point 	cf 	sale 	expertise 	and 	with
the 	capabi:~ty of 	provid~~g detailed 	info~.atio~.
9 	T~t~ng thr 	Hass}p 	o~t 	0: 	Ca~-Buv~no, 	Changing 	Times 	(Aug.
1988) f 	a 0': 	35-38.
10 	He",'s 	~cleases 	fr-om 	t~~e 	Cc.::- 	ar;j 	':. ::-uck 	R':,n-::al 	c.:lc. 	Leasing
l-.ssociation 	of 	EichigaL 	(C;..::.·.·.;..r...:.) 	(August 	19[:8) 	ar.d 	LIe 	I~ic:~i:j2.:;
Cr-edit 	Unicn 	Lec~ue 	(hu;us~ 	928).

· .: . -'-
~~e Honorable 	Dick 	P06~h~mus
Scp~err~er 28, 	19GO
4
1~.
r:~sumcrD. 	The 	~ichig8n Credi~ Union 	League 	Gstima~es thnt
consumcr~ purcho?i~g c~r5 at 	th~~e sale! 	pd¥ 	an 	avera~e cf 	~900
less 	per 	vehic.~c, than 	\.;ould 	;:;e 	puid 	et 	i.\ 	"conventional" 	used 	3r
dealer. 	For 	arrunging 	these 	sales, 	credit 	unions 	ere
cornf.?nsE\ted 	directly 	through 	payment. 	of 	a 	fee 	by 	the 	fleet 	owner,
or 	indirectly 	through 	the 	interest 	~harges they 	rec~ive for
financing 	the 	sale 	of 	these 	automobiles. 	Under 	2;:1cnded 	Sectio:1
248, 	credit 	unions 	could 	be 	unla\>"fully 	engaged 	in 	the 	brokGring
..:;f 	autoi:'lobiles. 	Further, 	the 	11ichigun 	Cre~i t 	Union 	League
&stima::'es 	that 	a 	signiflc;ant. 	portion 	of 	the 	L.ee": 	sales 	spo:~sor(;-d
by 	mOIT~I~~ credit 	~ni~ns are 	held 	in 	or 	near 	small 	communities
where 	few 	car-buying 	alternatives 	are 	available. 	n)is 	practice
promotes 	competi tio:1 	in 	the 	u.sed 	car mar}: at.
Fle~t sales 	ID<1¥ 	also 	benefit 	consumers 	in 	the 	c::Jr 	ri :)'~al
market. 	The 	rental 	price 	of 	an 	automobile 	d0pencis 	i:: 	pa~= 	on 	the
the 	rental 	agency's 	ability 	to 	dispoSQ 	of 	that 	car 	e:ficiently
,.,,..,,.,,.. 	,+- 	r'-:-:'\ohoo 	....t- ... i.£~ecl ,.... .£.~.:.~.".... 	1'.... "c; .. -.1""-.1 	':>""L..L1VII 	""0 	lnJ.gn-.:.
hinder 	the 	ability 	of 	fleet 	owners 	to 	sell 	their 	inventories 	a:1ci
therefore 	may 	tend 	to 	increase 	the 	cost 	of 	car 	rentals.
Mo~eover, cars 	purchased 	at 	fleet 	sales 	typically 	carry 	a
12-month 	or 	12,000 	mile 	power 	train 	warranty, 	while 	many 	other
used 	cars 	carry 	only 	a 	gO-day 	warranty 	or 	none 	at 	all. 	This
additional 	warranty 	coverage 	itself 	has 	a 	value 	to 	the 	consumer
of 	several 	hundred 	dollars 	ba~ed on 	the 	cost 	of 	a 	comparable
service 	contract. 11 	Established 	automobile 	dealers 	may 	benefit
from 	these 	warranties. 	Hertz, 	for 	e~~mple, 	contracts 	with 	a
network 	of 	dealers 	to 	prov:'de 	warran'':)' 	::;ervice 	on 	cars 	it 	sells.
Accordi~g to 	Hertz 	officia~s, a 	buyer 	r-hones 	a 	toll-free 	n~nber,
gets 	the 	name 	of 	the 	nearest 	dealer-ser~ice facili.ty, 	and 	takes
the 	vehicle 	to 	tha~ dealer. 	Automobile 	~~alers ~ith a
substantial 	investment 	in 	physical 	plants 	including 	service
facilities 	can 	receive 	an 	indirect 	benefit 	from 	these 	fleet
sales.
III. 	CO:1clusio):
The 	auto~obile indu.stry 	is 	dyna~ic, with 	an 	in:reasins
nur.-tber 	of 	dee..1E:rs 	o::er-: :"l 	a 	g:::-eater 	variety 	of 	sales 	and 	se:-vice
choices 	to 	c~nsumers. 	h~:~omc~ile brokering 	is 	a 	sales 	innovati~:1
that 	increases 	consc~er- choices. 	The 	pro~osed amencments 	to
sec-:.iC:l 	248 	could 	pr~ver.:-. consumers 	from 	benef i tine 	from 	thL
i~nova~ion ~nd protec~ established 	auto~obi:e deal~=s frc~
Becau~'? the 	used 	car 	::-Iar}~et suffers 	from 	information
p:::-oblerns, 	tje 	cos~ of 	get~ing this 	coverage 	on 	most 	used 	cars 	is
ex~remely high. 	Rental 	fleets 	keep 	well-d~cumente~ ~1_inte~a~=e
his~oriss of 	their 	vehicles, 	and, 	as 	a 	result, 	the 	ccs~ c::
warr2.:1".:Y 	cc··'e:::-age 	is 	:c,,:el: 	t:J2.:1 	ler 	most. 	o~h·~::- usc; 	:::. r 	ce:. :..:::::-s,

Tha 	J-ionorabl!: 	l")i.c}: 	Posthumus
Scpte~~ar 23, 	1988
c(')~?ctition. 	':.'h", 	likel~' 	nct ·c.r~ Qot 	of 	pr:)hititing 	bro}:crir.g 	""~ll
bn 	to 	reduc~ conrrurne~ choicot 	and 	incrGc~n eutcmobi16 	p=icoc.
,~O ~ll: .. )r&ciatl) 	thi". 	opportuni ty 	~O 	providn 	our vie"'!! 	0:.. 	':::'c
cc~potitivQ effocts 	ot 	HB 	4390 	and 	u::;o 	you 	to 	rRccna!~a= tha
p::opoEt.ld 	e:rnendmant13 	t.o 	soction 	248. 	WQ 	\.:ol.:ld 	bn 	heppy 	to
p~ovioc ~··lrthor in~o~,ation at 	)';:iur 	t'ClqUC:Jct.
V~ry ~~l¥ your~,
'-;J 	, 	'I
~/{P-.>" 	~
Hc.rk 	o. 	Kindt
Oirtlctor
Clc.valtln'! 	~~c;:!.ontJ.J. Off:'CEll