FTC Staff Comment to the Hon. Richard Katz Concerning California Department of Motor Vehicles Proposed Regulation on Auto Broker Advertising

11000 WILSHlfll; ewo.
sum: 1310e
LOS "NGE~U, C" 1lOO~4
(t131 209-1890
UNITED STATES OF' AMERICA
FEDERAL TRADE COMMISSION
LOS ANG~LES REGIONAL OfFICE COMMISSION AUTHORIZED
January 	29, 	1988
Richard 	Katz
Chairman
Assembly 	Transportation 	Committee
state 	Capitol
P.o. 	Box 	942849
Sacramento, 	CA 	94249-0001
Dear Mr. 	Katz:
We 	are 	pleased 	to 	submit 	this 	letter 	in 	response 	to 	your
request 	for 	comments 	on 	the 	proposed 	Department 	of Motor
Vehicles' 	regulation 	regarding 	advertising 	by 	automobile 	dealers,
including 	specifically 	automobile 	brokers. l
The 	California 	Department 	of 	Motor Vehicles' (DMV) 	proposed
amendment 	to 	Regulation 	403.04, 	Article 	4, 	entitled 	"Vehicle
Availability," 	would 	prohibit 	dealers 	from 	advertising 	a 	specific
vehicle 	or a 	class 	of vehicles 	unless 	it 	is 	in 	the 	dealer's
possession 	or 	available 	to 	the 	dealer, 	"pursuant 	to 	a 	franchise
agreement with 	the 	manufacturer 	or distributor of 	the
y,ehiole(sl.."
The 	Federal 	Trade 	Commission 	is 	empowered under 	15 	U.S.C.
§§ 	41 	et 	seg. 	to 	prevent unfair 	methods 	of 	competition 	and 	unfair
or 	deoeptive 	acts 	or 	practices 	in 	or 	affecting 	commerce.
Pursuan~ to 	this 	statutory mandate, 	the 	Commission has 	attempted
to 	encourage 	competition 	among 	alternative 	providers 	of 	goods 	and
services 	by, 	among 	other 	things, 	identifying 	and 	seeking 	the
removal 	of 	restrictions 	that 	impede 	competition, 	increase 	costs,
and 	harm 	consumers 	without 	providing 	significant 	countervailing
benefits. 	The 	Commission 	has 	acquired 	significant 	expertise 	in
advertising 	restrictions 	in 	general 	which may 	be 	of 	use 	to 	you.
Additionally, 	the 	Commission 	staff 	has 	studied 	the 	impact 	or
certain 	state 	statutes 	affectinq 	automobile 	dealers, 	and 	the
1 	These 	comments 	represent 	the 	views 	of 	the 	Los 	Angeles
Regional 	Office, 	and 	the 	Bureaus 	of 	Consumer 	protection,
Competition and 	Economics 	and 	do 	not 	necessarily 	represent 	the
views 	of 	the 	Commission 	or 	any 	individual 	Commissioner. 	The
Commission, 	however, 	reviewed 	these 	comments 	and 	authorized 	their
submission.
1

information produced by 	those 	studies 	m~y be 	useful 	in 	analyzinq
the 	effects 	of 	the 	proposed 	regulation.
The 	importance 	ot 	advertising 	in 	a 	competitive 	economy
cautions 	against 	placing 	restrictions 	on 	advertising 	in 	the
absence 	of 	evidence 	that 	consumers 	are 	likely 	to 	be 	misled. 	As 	a
general 	proposition, 	restrictions 	on 	truthful, 	non-deceptive
advertising by 	competitors 	tend 	to 	raise 	prices 	for 	the 	goods 	and
services 	offered 	by 	those 	competitors. 3
The 	proposed 	regulation 	would 	place 	significant 	restrictions
on 	advertising 	by 	automobile 	brokers, 	who 	neither maintain
inventories 	nor 	hold 	franchises 	from 	vehicle 	manufacturers 	or
distributors. 	In 	this 	case, 	the 	restriction may 	deprive
consuroers 	of 	the 	truthfUl, 	non-deceptive 	information 	that 	they
can 	purchase 	cars 	through brokers. 	without 	this 	information,
consumers 	may 	needlessly 	limit 	their comparison 	shopping, 	thereby
reducing 	pressure 	on 	competitors 	to hold 	down 	prices.
2 	The 	Staff 	Report 	by 	FTC 	Economist 	Robert 	Rogers,
"Effect 	of State 	Entry RegUlation 	on 	Retail 	Automobile 	Markets"
(January 	1986), 	concluded 	that 	state 	laws 	that 	restrict 	the 	entry
of 	new 	dealerships 	(for 	example, 	"relevant market 	area lt 	(RMA)
legislation 	similar 	to 	Californials) 	raised 	automobile 	prices, 	on
average, 	by 	6%. 	The 	results 	of 	this 	FTC 	study 	are 	consistent
with 	other 	studies 	showing 	that 	increased 	prices 	result 	from 	RMA
laws. 	See 	Eckard, 	E.W., 	Jr., 	tiThe 	Effects 	of 	State 	Automobile
Dealer Entry 	Regulations 	on 	New Car 	Prices,tI 	Economic 	Inquiry,
Vol. 	XXIV, 	No. 	2 	(April 	1985), 	pp. 	223-42, 	and Smith, 	R.L.
"Franchise Regulation: 	An 	Economic 	Analysis 	of 	State
Restrictions 	on Automobile 	Distribution,tI 	Journal 	of 	Law 	and
Economics, 	Vol. 	XXV 	(April 	1982), 	pp. 	125-57. 	(Smith 	notes 	at 	p.
154, 	tiThe 	result 	[of 	state 	regulation 	of manufacturer-dealer
relations 	in 	automobile 	franchising) 	has 	been 	a 	significant
increase 	in 	vehicle 	prices 	-- 	resulting 	in 	a 	large 	wealth
transfer 	from 	consumers 	to 	dealers 	and 	a 	reduction 	in 	the 	volume
of 	new-vehicle 	sales.")
3 	Cleveland Regional 	Office 	and 	Bureau 	of 	Economics,
Federal 	Trade 	Commission, 	Improving Consumer Access 	to 	Legal
Services: 	The 	Case 	for 	Removing 	Restrictions 	on 	Truthful
Advertising 	(1984): 	Bureau 	of 	Economics, 	Federal 	Trade
commission, 	Effects 	of 	Restrictions 	on Advertising 	and 	Commercial
Practice 	in 	the 	Professions: 	The 	Case 	of 	optometry 	(1gS0);
Benham, 	The 	Effects 	of 	Advertising 	of 	the 	Price 	of 	Eyeglasses, 	15
J.L. 	& Econ. 	337 	(1972). 	See 	akso 	American 	Medical 	Assln, 	94
F.T.C. 	701 	(1979), 	aff'd 	638 	F.2d 	443 	(2d 	Cir. 	1980), 	aff1d 	memo
by 	an 	equally 	divided 	Court, 	455 	U.S. 	676 	(1982) 	(llbroad 	bans 	on
advertising 	and 	soliciting 	are 	inconsistent with 	the 	nationls
public 	policyn).
2

It 	there 	is ·evidence 	of deception,4 	a 	disclosure 	requirement
may 	adequately 	protect 	consumers 	from 	deception 	while 	retaining
to 	the 	extent 	possible 	the 	benefits 	of 	competition 	and 	truthful,
non-deceptive 	advertising. 	W. 	note 	that 	the 	current version 	of
DMV Regulation 	403.04 	already 	appears 	to 	require, 	among 	other
things, 	that 	an 	automobile 	broker 	disclose 	that 	an 	advertised 	car
is 	not 	in 	its 	possession. 	Unless 	there 	is 	evidence 	of 	systematic
decept~on by 	brokp.r.~ SUbsequent 	to 	the 	adoption 	of 	the 	currel~t
rule, 	there 	may 	simply 	be 	no 	need 	for 	additional 	regulation. of
broker 	advertis ing . 	.
As 	a 	practical 	matter, 	the 	effect 	of 	the 	proposed 	regulation
may 	extend beyond 	advertising; 	the 	rule may 	indirectly 	prohibit
automobile 	brokerage. 	Since 	automobile 	brokers 	would 	not 	be 	in 	a
position 	to ~eet the 	requirements 	of 	the 	proposed 	regulation 	and
would 	have 	trouble 	advertising 	or 	informing 	others 	of 	their
services, 	the 	operations 	of 	automobile 	brokers may 	be 	inhibited
or 	even 	eliminated. S 	,
We 	recognize 	that 	controversy 	exists 	about 	the 	competitive
effects 	of 	automobile 	brokerage. 	We 	take 	no 	position 	on what
those 	effects 	might 	be. 	However, 	it 	is 	our view 	that
restrictions 	on 	advertising 	shOUld 	not 	be 	utilized 	as 	an 	indirect
method 	of 	eliminating 	automobile 	brokers 	from 	the market.
In 	sum, 	to 	the 	extent 	that 	the 	proposed 	regulation 	limits
truthful, 	non-deceptive 	advertising, 	the 	regulation 	may 	harm
consumers. 	Given 	the 	complexity 	of 	the 	issues 	involved, 	the
purposes 	of 	the 	proposed 	regulation 	and 	its 	probable 	costs 	and
benefits 	should be 	carefully 	evaluated.
Thank 	you 	for 	considering 	our 	comments. 	We 	would 	be 	happy
to 	supply 	copies 	of 	the 	studies 	and 	other materials 	cited 	in 	this
letter 	if 	you 	so 	desire, 	or 	to 	provide 	any 	other 	assistance.
~ 	'~4---x!
K. 	TZ'~~ 	CJ
Regional 	Director
Los 	Angeles 	Regional 	Office
4 	For 	an 	illustrative 	discussion 	of 	some 	of 	the 	factors
the 	Federal 	Trade 	Commission 	considers 	in 	determining 	Whether 	an
advertisement 	is 	deceptive, 	~, 	Policy 	statement 	on 	Deception,
appended 	to 	Cliffdale 	Associates. 	Inc., 	et 	al., 	103 	FTC 	110~ 	174-
184 	(1983).
5 	See, 	e.g., 	"Auto 	Brokers 	See 	Threat 	in 	DMV 	Proposal,"
Los 	Angeles 	Times, 	November 	13, 	1987, 	§I 	at 	p. 	1.
J
TOTAL P.04