Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution

FRANCHISE distribution systems are a relatively recent economic development and have proved to be highly effective in industries ranging from hotels to fried chicken restaurants. At the same time, reasons for the economic success and rapid growth of franchise distribution are not well understood.' Misperceptions about the nature of franchising have led to (or at least not prevented) a confusing tide of new regulations and court decisions pertaining to franchising. In particular, government and the courts have vacillated on the legality of territorial security, which is (at least implicitly) a significant aspect of virtually all franchise arrangements. A second key aspect of the franchise system is that it typically involves a relationship between a large corporation and the owner of a small business. In recent years statutes have been enacted which portend to protect the "little guy" from the rapacious acts of the large and powerful. The interplay between these two concerns is particularly acute in the franchise distribution of new automobiles. Efforts by the states to deal with the issues involved in franchise distribution of automobiles have produced a highly varied collection of regulations. After a brief examination of the economics of automobile franchising, this paper presents an analysis of state regulations of manufacturer-dealer relations in the automobile industry. The analysis provides a basis for an econometric study of the economic impact of the state regulations. Regulations are viewed in the study as producing wealth transfers among the