Rent Seekers Fighting Back

Rent Seeking is using political lobbying to increase one's share of existing wealth without creating additional wealth. In many cases, the rent seeker actively prevents new wealth from being created in order to protect their share. The obvious example of rent seekers are patent trolls, but more recently other rent seekers have been in the news.

Car dealerships are a great example of the rent seeking class. Politically influential on a local and state level, car dealerships have after a long history lobbied for and gotten laws that force manufacturers to sell through them rather than directly to the consumer. There isn't a Walmart or Costco of cars because of laws designed to protect dealerships. These laws prevent manufacturers from significantly changing the terms of their relationships with their dealers and requires that they use essentially the same business model that existed before the information age. The Big Three automakers don't just have to contend with a larger union workforce than foreign competitors, they also have to keep doing business through many more of their inefficient existing relationships thanks to car dealership franchise laws that force manufacturers to continue to renew their contracts with dealerships*. This legal monopoly that the dealers have results in a transfer of wealth from consumers and manufacturers to the dealerships. For more detail on this subject, see this paper State Franchise Laws, Dealer Terminations, and the Auto Crisis.

These rent seekers recently won a victory in New Jersey when Tesla's direct sales to consumers were banned. Tesla had no previous existing relationship with dealers, and the existing law does not have provisions to handle a car company selling directly to consumers without giving a cut to some politically connected middlemen so Tesla sales were banned in the state. The mentality of the rent seekers is captured perfectly in this article on The Verge.

"This Musk guy, he wants all the profits for himself," says Tom Dougherty, a 25-year veteran of the business who now works in sales at the BMW dealership in upscale Princeton, New Jersey. "They wanted to go direct, which means no sales force. That’s cutting out a lot of people. No way that’s gonna fly."

Go back to the definition of rent seeking - these dealers think it is perfectly normal for them to insert themselves into a transaction between two parties that have no relationship to them, Tesla and the consumer, and take a cut from that transaction. It would be more efficient in the long run to pay the dealerships and sales people to find new jobs than it would be to continue having them and any future employees muck up the automobile transaction process with their legally protected inefficient local monopolies.

Another group of rent seekers are the owners of taxi medallions. Taxi's are protected from the pressures of a competitive market by a policy that grants them a legal monopoly as long as they operate in a specific manner. Taxi's can't compete on price, and they lobby for restrictions in the number of medallions issued so they weren't forced to compete very much on service quality either. That changed when Uber, Lyft and Sidecar started turning anyone with a car and spare time into potential competitors to taxis.

But a few days ago taxi companies won a victory in Seattle when they restricted the above companies to only having 150 cars active at a time. This limitation will make it very difficult for consumers to efficiently use the services of these companies.

It's unfortunate that rent seekers are winning these battles - whenever rent seekers win it means that innovation is delayed and consumers are inconvenienced. All of this happens so that parasites like Tom at the dealership and taxi medallion owners can claim a share of wealth that they are only getting because better people are being kept from performing the same job. 

*Ironically, during the auto bailout bankruptcy reorganization many Republicans remained either blissfully or willfully ignorant about how car dealerships are inefficient legal monopolies backed by the government. Their continued existence has very little to do with free markets.
8 responses
Yo, New Jersey, not New Hampshire. (Feel free to delete this pedantic correction to a solid article.)
Can you imagine how different things will be for companies like apple who sell directly to consumers if there was a similar deal for computer makers. How about hotels not being able to sell directly to the consumer, forcing the customer to buy through an OTA or a Travel Agent. This sucks!
Thanks MJ, fixed that. Iaax - That's what makes the whole thing so insane. We know that this isn't the best model for any other product. But dealership owners donate to politicians on both sides of the aisle and perpetuate the system that only benefits themselves.
The one great thing about innovators is they'll always find a way and have the support of the growing class.
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