TJP

Let the Market determine the Optimal Number of U.S. Car Dealership

By Byron A. Ellis – May 20, 2009

Reducing Chrysler and General Motors’ car dealerships will not help the car makers or American car buyers. In fact, closing dealership will reduce competition and increase offer prices for Chrysler and General Motors vehicles.

The downfall of the American auto industry is not about the quantity of dealership; rather it is about the quality, aesthetic, and pricing of American made cars by the manufacturers. Thus, it is a strategic problem embodied in the lack of vision and poor managerial attributes of U.S. auto executives.

Even today, they failed to recognize that exogenous market forces determine the optimal quantity of dealership, not government or managerial fiat; these are failed strategies that were used in the former Soviet Union.

When the economy reinvigorates and demand for automobiles increases, will the reduce number of U.S. auto dealerships clear the market? Or will transplant automakers are likely to fill the void by increasing their dealerships and capturing a greater share of the U.S. market.

The strategic decision to reduce competition amongst U.S. auto dealerships is likely to inflict the final crippling blow the U.S. auto industry. It also signals that the U.S. government and the U.S. auto executives do no believe in competitive markets.

It is, however, this view of not needing to compete that has put the U.S. auto industry on a downward spiral.

The auto industry and the government should rethink the mandate to reduce competition amongst U.S. auto dealerships, particularly given the existing fiscal and monetary expansion.

Fiscal and monetary expansion will increase income and hence demand for new automobiles. And, in the absence of optimal quantity of U.S. auto dealership, even die-hard buy American consumers will find themselves purchasing transplant vehicles.

Extreme government intervention in markets often reduces competition and lead to shortages, lack of innovation, and high prices.

The government should let the market determine the optimal number of U.S. car dealerships.

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