FTC Staff Comment to the Hon. Woods Bowman Concerning Illinois H.B. 1173 to Prohibit Fleet Dealers From Conducting Fleet Sales 10-15 Miles Outside Their Licensed, Permanent Dealer Lots

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Chkafo(l') n!~KtOl\1I1 Offiec
April 	24, 	1987
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The 	Honorable 	Woods 	Bowman
State 	Representative
2100 	Ridge
Evanston, 	IL 	60201
Dear 	Mr. 	Bowman:
The 	Federal 	Trade 	Commission 	staff 	is 	pleased 	to 	have 	this
opportunity 	to 	respond 	to 	your 	letter 	of 	APiil 	15, 	1987,
requesting 	our 	comments 	on 	House 	Bill 	1173. 	This 	bill 	would
have 	the 	effect 	of 	prohibiting 	fleet 	dealers, 	such 	as 	Avis 	and
Hertz, 	from 	conducting 	fleet 	sales 	outside 	a 	10 	or 	15 	mile 	radius
around 	their 	licensed, 	permanent 	dealer 	lots. 	The 	probable
result 	of 	this 	legislation 	would 	be 	to 	reduce 	competition 	and 	to
increase 	the 	prices 	paid 	by 	Illinois 	consumers 	for 	used 	cars. 	We
believe 	that 	consumers 	will 	be 	best 	served 	if 	the 	market 	is 	left
free 	to ·operate 	without 	unnecessary 	regulation, 	and 	we 	therefore
recommend 	that 	this 	bill 	not 	be 	enacted.
Our 	interest 	in 	this 	legislation 	stems 	from 	the 	Commission's
mandate 	to 	enforce 	the 	antitrust 	and 	consumer 	protection 	laws 	of
the 	united 	States. 	Section 	5 of 	the 	Federal 	Trade 	Commission 	Act
prohibits 	unfair 	methods 	of 	competition, 	and 	unfair 	or 	deceptive
acts 	or 	practices. 	By 	enforcing 	this 	statute, 	the 	Commission
staff 	has 	gained 	substantial 	experience 	in 	analyzing 	the 	impact
of 	various 	restraints 	on 	competition 	and 	the 	costs 	and 	benefits
to 	consumers 	of 	such 	restraints. 	In 	recent 	years 	we 	have 	been
involved 	in 	several 	such 	issues 	that 	specifically 	related 	to 	the
used 	car 	market. 	In 	1984, 	for 	example, 	the 	Commission 	issued 	the
·Used 	Car 	Rule~ 	to 	reduce 2 the 	effects 	of 	oral 	misrepresentations
in 	used 	car 	transactions. 	The 	development 	of 	this 	rule, 	as 	well
as 	the 	conduct 	of 	investigations 	and 	studies 	relating 	to 	the
1
2
The 	views 	presented 	in 	this 	letter 	are 	those 	of 	the 	Chicago
Regional 	Office 	and 	Bureaus 	of 	Competition, 	Consumer
Protection, 	and 	Economics 	and 	are 	not 	necessarily 	those 	of
the 	Commission 	itself. 	The 	Commission 	has, 	however, 	voted
to 	authorize 	us 	to 	present 	these 	comments.
Used 	Motor 	Vehicle 	Trade 	Regulation 	Rule, 	16 	C.F.R. 	§ 	455.

The 	Honorable 	Woods 	ao~man
Page 	2
automobile 	industry, 	have 	provided 	the 	Commission 	staff 	with
substanJial 	experience 	in 	several 	aspects 	of 	the 	automobile
market.
In 	November 	of 	1986, 	we 	were 	invited 	to 	provide 	written
comments 	on 	House 	Bill 	787, 	which 	was 	very 	similar 	to 	the
legislation 	that 	is 	now 	being 	considered. 	We 	opposed 	that
bill. 	It 	was 	our 	belief 	that 	HB 	787 	was 	likely 	to 	harm 	consumers
by 	increasing 	the 	price 	of 	used 	cars. 	Therefore 	we 	believe 	that
the 	Illinois 	le9islature 	acted 	in 	the 	best 	interest 	of 	consumers
when 	it 	chose 	not 	to 	enact 	that 	bill.
as 	1173 	raises 	the 	same 	issues. 	HB 	1173 	woulq amend 	the
Illinois Vehicle 	Code 	to 	prohibit 	the 	issuance 	of 	a 	supplemental
license 	to 	a 	new 	or 	used 	vehicle 	dealer 	int~nding to 	hold 	a 	sale
outside 	of 	his 	or 	her 	relevant 	market 	area. 	It 	is 	our
understanding 	that 	most 	fleet 	sales 	are 	currently 	held 	outside
the 	seller's 	relevant 	market 	area. 	HB 	1173 	therefore 	proposes 	to
virtually 	eliminate 	fleet 	sales 	as 	they 	are 	presently 	conducted.
Th~.purpose of 	this 	bill 	is 	apparently 	to 	protect 	consumers
against 	"fly-by-night" 	used 	car 	sellers. 	Illinois 	already
addressessthese 	concerns, 	however, 	through 	the 	Illinois 	Consumer
Fraud 	AC 6 and 	through 	its 	regular 	licensing 	of 	new 	and 	used 	car
dealers. 	We 	are 	not 	aware 	of 	any 	reason 	to 	believe 	that 	HB 	1173
would 	provide 	consumers 	any 	addit~on protection 	from 	fly-by-night
operators.
3
4
5
6
The 	FTC 	Bureau of 	Economics' 	Staff 	Report 	on 	the 	Effect 	of
State 	Entry 	Regulation 	on 	Retail 	Automobile 	Markets, 	January
1986, 	is 	a 	recent 	example 	of 	the 	FTC's 	concern 	with 	anti-
competitive 	regulations 	in 	the 	automobile 	market.
Section 	2 of 	the 	Motor 	Vehicle 	Franchise 	Act 	defines
relevant 	market 	area 	as 	a 	10 	or 	15 	mile 	radius 	around 	the
dealer's 	principal 	location, 	depending 	upon 	the 	population
of 	the 	county. 	Ill. 	Rev. 	Stat. 	ch. 	121 	1/2, 	S 	752 	(1985).
Illinois 	Consumer 	Fraud 	and 	Deceptive 	Business 	Practices
Act, 	Ill. 	Rev. 	Stat. 	ch. 	121 	1/2, 	§ 	262 	et 	seq. 	(1985).
Illinois 	Vehicle 	Code, 	Ill. 	Rev. 	Stat. 	ch. 	95 	1/2, 	S 5-101
et 	seq. 	(1985).

The 	Honorable 	Woods 	Bowman
Page 	3
Indeed, 	we 	believe 	that 	HB 	1173 	would 	adversely 	affect
Illinois 	consumers 	by 	restricting 	competition 	in 	the 	used 	car
market. 	This 	in 	turn 	would 	be 	likely 	to 	lead 	to 	price 	increases.
The 	usual 	practice 	of 	fleet 	dealers, 	such 	as 	Avis 	and 	Hertz, 	is
to 	hold 	used 	car 	sales 	on 	credit 	union 	property. 	Such 	sales
entail 	low 	overhead, 	and 	fleet 	dealers 	may 	therefore 	pass 	along
substantial 	savings 	to 	consumers. 	Credit 	unions 	recently
surveyed 	by 	the 	Illinois 	Credit 	Union 	League 	estimated 	that
members 	paid 	an 	average 	of 	$1,118 	less 	for 	a 	used 	car 	sold 	at 	a
credit 	union 	sponsored 	fleet 	sale 	than 	they 	would 	have 	paid 	a
'~eonventional" 	used 	car 	dealer. 	Credi t 	unions, 	however, 	tend 	to
be 	located 	in 	parts 	of 	the 	state 	other 	than 	where 	the 	fleet
owners 	maintain 	their 	principal 	lots. 	Thus 	the 	principal 	effect
of 	restricting 	supplemental 	licensing 	for 	used 	car 	dealers 	will
be 	to 	increase 	the 	prices 	paid 	by 	consumers 	for 	those 	cars.
The 	effects 	may 	be 	particularly 	pronounced 	in 	certain 	areas
of 	the 	state. 	We 	understand 	that 	many 	fleet 	sales 	are 	made 	in
the 	smaller 	cities 	or 	towns 	where 	there 	may 	only 	be 	a 	limited
number 	of 	conventional 	dealerships. 	Competition 	from 	the 	fleet
sales 	m~y 	be 	especially 	important 	in 	this 	context.
In 	addition, 	the 	proposed 	bill 	would 	harm 	consumers 	in 	the
car 	rental 	market. 	Fleet 	sales 	benefit 	this 	market 	by 	enabling
fleet 	dealers 	to 	turn 	over 	their 	inventories 	more 	efficiently.
By 	effectively 	prohibiting 	fleet 	sales 	as 	they 	are 	now 	conducted,
1m 	1173 	would 	tend 	to 	increase 	the 	qost 	of 	car 	rentals.
In 	conclusion, 	we 	believe 	that 	HB 	1173 would 	ultimately 	harm
co~surners of 	used 	vehicles. 	The 	unjustified 	limitations 	on 	fleet
sales 	would 	lead 	to 	unnecessary 	increases 	in 	fleet 	dealers' 	costs
and, 	correspondingly, 	to 	unnecessary 	increases 	in 	the 	prices
consumers 	pay 	for 	used 	vehicles. 	Restricting 	fleet 	sales 	1n 	thOe
manner 	proposed 	would 	also 	reduce 	the 	competition 	that 	these
sales 	provide 	to 	other 	segments 	of 	the 	used-car 	market. 	The
proposed 	bill may 	also 	lead 	to 	similar 	increases 	in 	price 	in 	the
rental 	vehicle 	market. 	For 	all 	of 	the 	above 	reasons, 	the 	staff
of 	the 	Federal 	Trade 	Commission 	recommends 	that 	HB 	1173 	not 	be
enacted.
We 	appreciate 	having 	had 	this 	opportunity 	to 	provide 	our
views 	on 	these 	issues.
/~.:~~~;' Director 	'
Chicago 	Regional 	Office
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