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Ronald Reagan Presidential Library
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This is a PDF of a folder from our textual collections.
Collection: Roberts, John G.: Files
Folder Title: JGR/Anti-Fleet Subsidy Legislation
Box: 2
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UNITED STATES DEPARTMENT OF COMMERCE
United STATES of AMERICA
Washington, D.C. 20230
JAN 10 1984
Honorable John D. Dingell
Chairman, Committee on Energy
and Commerce
U.S. House of Representatives
Wishington, D.C. 20515
Dear Mr. Chairman:
The Department of Commerce has reviewed H.R. 1415, a bill
"To protect franchised automobile. dealers from
unfair price discrimination in the sale by the
manufacturer or importer of new motor vehicles,"
and we hereby submit our views on the legislation.
Under H.R. 1415, an automobile manufacturer would be prohibited
from (a) selling or leasing any passenger car, truck or station
wagon to any person at a price lower than that accorded to its
franchised dealers; (b) imposing upon a doaler any restrictions
that are not imposed upon all other purchasers; and (c) providing
to a purchaser any rebate or discount that is not provided to all
purchasers. In addition, a manufacturer would be unable to sell a
vehicle to any person for resale to a unit of federal, state or
local government at a price which is lower than the price at which
the vehicle is sold to a dealer during the same period for resale
to a unit of government.
We oppose enactment of H.R. 1415. Despite its avowed intention
to provide protection against "unfair price discrimination, 11 in
reality the bill would prohibit marketing practices that vehicle
manufacturers and their fleet customers have found highly
efficient and mutually beneficial. We believe H.R. 1415 is
anti-competitive and designed to benefit the special interests of
franchised automobile dealers at the expense of American
consumers.
H.R. 1415 would eliminate competition in the fleet sales market by
prohibiting large volume fleet purchasers, including the federal
government, from negotiating with automobile manufacturers for
lower prices. We believe that large volume fleet purchasers,
Prepared by: OAGC/L Lisa Lindeman 377-1328
back EA (C. Miller)
IPM Chron
GC Chron
File H,R. 1415
Lisa Lindeman
2
including the federal government, should be allowed to negotiate
with manufacturers for lower prices in order to enhance
competition and encourage efficient allocation of resources.
We understand that the Department of Justice is opposed to the
bill because it would prohibit discounts on direct sales by
manufacturers both to governmental and commercial fleet purchasers,
and that the Department intends to submit a report outlining its
opposition to the bill which will focus on its undesirable effects.
We have been advised by the Office of Management and Budget
that there is no objection to the submission of this letter
to the Congress from the standpoint of the Administration's
position.
Sincerely,
thing I Mayals
Irving P. Margulies
Acting General Counsel
GENERAL COUNSEL OF THE
UNITED STATES DEPARTMENT OF COMMERCE
MOTRO STATES of AMERICA
Washington, D.C. 20230
JAN 10 1984
Honorable Peter W. Rodino
Chairman, Committee on the Judici ry
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
The Department of Commerce has reviewed H.R. 1415, a bill
"To protect franchised automobile dealers from
unfair price discrimination in the sale by the
manufacturer or importer of new motor vehicles,"
and we hereby submit our views on the legislation.
Under H.R. 1415, an automobile manufacturer would be prohibited
from (a) selling or leasing any passenger car, truck or station
wagon to any person at a price lower than that accorded to its
franchised dealers; (b) imposing upon a dealer any restrictions
that are not imposed upon all other purch sers; and (c) providing
to a purchaser any rebate or discount that is not provided to all
purchasers. In addition, a manufacturer would be unable to sell a
vehicle to any person for resale to a unit of federal, state or
local government at a price which is lower than the price at which
the vehicle is sold to a dealer during the same period for resale
to a unit of government.
We oppose enactment of H.R. 1415. Despite its avowed intention
to provide protection against "unfair price discrimination, " in
reality the bill would prchibit marketing practices that vehicle
manufacturers and their fleet customers have found highly
efficient and mutually beneficial. We believe H.R. 1415 is
anti-competitive and designed to benefit the special interests of
franchised automobile dealers at the expense of American
consumers.
H.R. 1415 would eliminate competition in the fleet sales market by
prohibiting large volume fleet purchasers, including the federal
government, from negotiating with automobile manufacturers for
lower prices. We believe that large volume fleet purchasers,
Prepared by: OAGC/L Lisa Lindeman 377-1328
bee: EA (C. Miller)
IPM Chron
GC Chron
File H.R. 1415
Lisa Lindeman
2
including the federal government, should be allowed to negotiate
with manufacturers for lower prices in order to enhance
competition and encourage efficient allocation of resources.
We understand that the Department of Justice is opposed to the
bill because it would prohibit discounts on direct sales by
manufacturers both to governmental and commercial fleet purchasers,
and that the Department intends to submit a report outlining its
opposition to the bill which will focus on its undesirable effects.
We have been advised by the Office of Management and Budget
that there is no objection to the submission of this letter
to the Congress from the standpoint of the Administration's
position.
Sincerely,
thing I Mayals
Irving P. Margulies
Acting General Counsel
THE WHITE HOUSE
WASHINGTON
June 6, 1984
MEMORANDUM FOR BRANDEN BLUM
LEGISLATIVE ATTORNEY
OFFICE OF MANAGEMENT AND BUDGET
FROM:
JOHN G. ROBERTS 022
ASSOCIATE COUNSEL TO THE PRESIDENT
SUBJECT:
DOJ Draft Testimony on H.R. 5305 and
H.R. 1415, Bills to Protect Franchised
Automobile Dealers and Consumers From
Unfair Price Discrimination in Sale by
Manufacturers of New Vehicles
Counsel's Office has reviewed the above-referenced draft
testimony, and finds no objection to it from a legal
perspective.
ID #
CU
WHITE HOUSE
CORRESPONDENCE TRACKING WORKSHEET
o OUTGOING
H INTERNAL
I . INCOMING
Date Correspondence
Received (YY/MM/DD)
/
/
Name of Correspondent:
James murr
MI Mail Report
User Codes: (A)
(B)
(C)
Subject: DOJ draft testimony on H.R. 5305 and H.R. 1415, bills
to protect franchised automolile dealersand Consumer from
unfair price discrimination in pale by manufacturers
of new vehicles
ROUTE TO:
ACTION
DISPOSITION
Tracking
Type
Completion
Action
Date
of
Date
Office/Agency
(Staff Name)
Code
YY/MM/DD
Response
Code
YY/MM/DD
CUHOLL
ORIGINATOR 84,06,05
/
/
Referral Note:
COAT 18
K 84106.05
S 84,06,06
Referral Note:
10:00 AM
/
/
/
/
-
Referral Note:
/
/
/
/
-
Referral Note:
/
/
/
/
I
Referral Note:
ACTION CODES:
DISPOSITION CODES:
A Appropriate Action
I . Info Copy Only/No Action Necessary
A Answered
C Completed
C - Comment/Recommendation
R Direct Reply w/Copy
B Non-Special Referral
S Suspended
D - Draft Response
S For Signature
F . Furnish Fact Sheet
X Interim Reply
to be used as Enclosure
FOR OUTGOING CORRESPONDENCE:
Type of Response = Initials of Signer
Code = "A"
Completion Date = Date of Outgoing
Comments:
Keep this worksheet attached to the original incoming letter.
Send all routing updates to Central Reference (Room 75, OEOB).
Always return completed correspondence record to Central Files.
Refer questions about the correspondence tracking system to Central Reference, ext. 2590.
5/81
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
SPECIAL
June 5, 1984
LEGISLATIVE REFERRAL MEMORANDUM
TO:
LEGISLATIVE LIAISON OFFICER
Department of Commerce (LRM only)
Department of Defense - Werner Windus - : 697- 1305
Federal Trade Commission (LRM only)
Department of Transportation - John Collins - 426-4694
General Services Administration - Ted Ebert - 566-1250
DOJ draft testimony on H.R. 5305 and H.R. 1415, bills to protect
SUBJECT:
franchised automobile dealers and consumers from unfair price
discrimination in sale by manufacturers of new vehicles
The Office of Management and Budget requests the views of your
agency on the above subject before advising on its relationship
to the program of the President, in accordance with OMB Circular
A-19.
Please provide us with your views no later than
10:00 A.M. Wednesday, June 6, 1984. (NOTE: A hearing is scheduled for Thursday
June 7. Also agency reports opposing H.R. 1415 have been previously circulated
for review and cleared.)
Direct your questions to Branden Blum (395-38,02), the legislative
attorney in this office.
James C. Muri for
Assistant Director for
Legislative Reference
Enclosure
CC: K. Wilson
J. Dyer
R. Howard
M. Uhlmann
J. Cooney
K. Schwartz
L. Li
F. Fielding
DRAFT
STATEMENT
OF
CHARLES F. RULE
DEPUTY ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
BEFORE
THE
COMMITTEE ON ENERGY AND COMMERCE
SUBCOMMITTEE ON COMMERCE, TRANSPORTATION AND TOURISM
HOUSE OF REPRESENTATIVES
CONCERNING
AUTO MANUFACTURER'S PRICING POLICY - H.R. 5305
ON
JUNE 7, 1984
Mr. Chairman and Members of the Committee: I am pleased to
have the opportunity to provide you with the views of the
Department of Justice on H.R. 1415 and H.R. 5305, bills "to
protect consumers and franchised automobile dealers from unfair
price discrimination in the sale by the manufacturer of new
motor vehicles." For the reasons I will discuss, the
Department of Justice strongly recommends against enactment of
this legislation.
I.
Description of the Bills and the Existing Motor
Vehicle Distributional System
While these bills are similar in that their essential
feature is to prohibit price differentials to different classes
of motor vehicle purchasers, they are different in certain
respects. H.R. 1415 would substantially expand the "Automobile
Dealers' Day in Court Act," 15 U.S.C. 1221 et seq., which
governs certain relations between automobile manufacturers and
their dealers. Section 1 (a) of H.R. 1415 provides that each
franchise agreement between a motor vehicle dealer and
manufacturer shall be deemed to prohibit the manufacturer
from: (1) selling or offering to sell any vehicle to any
person (including any other dealer) during any period of time
at a price lower than that charged to its franchised dealers
for the same, similarly equipped model during the same period
of time; (2) imposing or enforcing any restriction on its
dealers not imposed or enforced against any other purchaser;
and (3) providing ultimate purchasers with any rebate,
discount, refund, promotional service, additional equipment, or
any other inducement or benefit not provided to all other
ultimate purchasers of the same model during the same time
period. An exception to prohibition (1) above permits the
manufacturer to sell a vehicle to any person (including any
other dealer) for resale to any unit of federal, state, or
local government, but only if the manufacturer does not sell or
offer to sell the same, similarly equipped model to any other
person for resale to any unit of government at any period of
time at a price lower than that charged to the franchised
dealer.
H.R. 5305, on the other hand, takes a somewhat different
approach to achieve essentially the same result. Section 2 of
that bill provides that no motor vehicle manufacturer may sell
or lease any new vehicle to any person (including a dealer)
during any sales period at a price higher than the lowest price
at which any other vehicle of the same model, similarly
equipped, is sold or leased, or offered for sale or lease, by
the manufacturer during that sales period. Section 3 provides
an exception allowing the manufacturer to sell or lease, or
offer to sell or lease, any new vehicle to (1) a non-dealer
employee of the manufacturer; (2) any department, agency, or
instrumentality of the United States or of a State or local
government; (3) or the American Red Cross. A further exemption
in Section 3 permits the sale or offer to sell any new vehicle
to any purchaser, if such sale or offer to sell by the
-2-
manufacturer is part of a qualified regional incentive sales
program for a designated region. To 60 qualify, all vehicles
of the same model, similarly equipped, sold or offered for sale
by the manufacturer in the region during the period, must be
sold and offered at the same price, and all vehicles sold in
such region during such period must be delivered by the
manufacturer to the purchaser in such regions.
Both bills would permit persons to bring actions against
motor vehicle manufacturers for damages and injunctive relief
based upon violations of the prohibitions contained in the
respective bills. In addition, H.R. 5305 permits awards of
punitive damages and attorneys fees in the discretion of the
court.
Both bills would substantially alter motor vehicle
manufacturers' existing relationships with their dealers and
the present distribution system for such vehicles. As such,
they appear to be based upon some belief that the existing
distribution system for motor vehicles is not efficient and is
flawed in ways that ultimately harm consumers. However, it is
in the manufacturers' interest to choose the most efficient
distribution system possible, so as to minimize the costs of
distributing motor vehicles to ultimate consumers and thereby
maximize their profits. We are aware of no evidence that the
existing distributional system is inefficient, nor are we aware
of any reasons why manufacturers would choose an inefficient
distribution system.
-3-
Currently, manufacturers distribute the great majority of
their motor vehicles to franchised dealers, who provide
particular services as desired by individual consumers and
other low-volume purchasers. Manufacturers also distribute
some of their vehicles directly to high-volume purchasers, such
as governmental units, taxi fleet operators, and rental car
companies, who use those vehicles to provide products or
services to consumers. Information we have seen indicates
that, at present, high-volume sales account for only
approximately 20% of the current motor vehicle market. The
remaining 80% of such sales are made through franchised
dealers.
Different groups of vehicle users value particular
distribution services differently and are, therefore, willing
to pay different amounts for those services. Thus, for
example, an individual who desires to purchase an automobile
for personal (or even business) use from a franchised dealer
will demand a certain mix of services. Some of those services
will be provided by the manufacturer (e.g., installation of
certain options, warranty terms, and delivery to the dealer).
while other services will be provided by the dealer (e.g.,
sales efforts, demonstrators, road preparation, and repair work
under the warranty).
High-volume purchasers, on the other hand, may be willing
to forego certain services or perform them themselves, saving
manufacturers those costs and enabling them to charge such
-4-
purchasers less than the price charged to franchised dealers.
In addition, there may be some benefits to manufacturers as a
result of use of their vehicles by high-volume purchasers that
also benefit franchised dealers. For example, consumers get
valuable information about the operation of vehicles they rent
that may factor in their purchase decisions, and rental car
company advertisements about the cars they lease likewise
benefit both the manufacturers of those cars and their
franchised dealers. The imporant point, however, is that
through whatever channel the vehicles are distributed,
consumers ultimately must bear the costs of the distribution
system as purchasers of vehicles, as ultimate users of
transportation services, and as taxpayers.
The ability of manufacturers to adjust their charges
according to different services provided enables them to
satisfy the varying demands of their different classes of
purchasers at prices that reflect the costs of the services
provided. If, as we believe, the existing system is efficient,
then enactment of H.R. 1415 or H.R. 5305 may require some
customers to pay for services they do not desire, some to
purchase desired services from a less efficient and more costly
system, and others to forego services for which they would be
willing to pay. These price differences most likely reflect
differences in consumer demands for vehicle services and the
costs of providing them efficiently. If price differences are
no longer permitted fully to reflect the costs associated with
-5-
different distribution methods because of governmental
intrusion into existing market mechanisms, then prices will
rise to cover the higher-cost distribution methods. By
negating existing efficiencies, these bills will raise the
overall costs of the motor vehicle distribution system, thereby
adversely affecting the interests of consumers.
An efficient distribution system enables both manufacturers
and dealers to compete most effectively against their
respective rivals and benefits consumers through the lowest
possible prices. Because tailoring a distribution system to
the diverse needs of different classes of customers can have
these beneficial effects, multiple distribution systems
frequently exist for other manufactured goods. For example,
food, hardware, household goods, and other products are offered
by large "no frills" stores, which may purchase directly from
the manufacturer, as well as by small "mom and pop" stores that
provide substantial services and which generally purchase
through intermediaries. Similarly, products such as appliances
and electronic and photographic equipment are distributed
through service-oriented department stores, as well as through
discount stores and mail-order catalog outlets that provide
few, if any, services. By precluding manufacturers from
charging different classes of purchasers different prices,
H.R. 1415 and H.R. 5305 totally ignore the value of services
provided and effectively would destroy the manufacturers'
incentives and abilities to tailor different distributional
-6-
systems to different needs. Consumers thereby would be denied
the benefits of the most efficient distribution system for
motor vehicles.
II. The Bills Are Unnecessary
Proponents of H.R. 1415 and H.R. 5305 have labeled them as
bills to prevent "unfair price discrimination." We are not
aware that any price discrimination is occurring, and hence, we
believe this characterization to be erroneous. Price
discrimination occurs when prices charged do not reflect the
costs of doing business with particular customers or groups of
customers. Thus, price discrimination may occur when different
prices are charged to persons for whom the cost of doing
business is the same; conversely, it may occur when the same
price is charged to persons for whom the costs of doing
business are different. Because proponents of these bills have
not shown that any differences in prices charged do not reflect
the different costs of doing business with franchised dealers
and high-volume purchasers, the existence of price
discrimination has not been established. Even if there were
some price differences not fully accountable by cost
differences among different customer classes, these bills
unnecessarily go far beyond existing prohibitions against price
discrimination as prohibited by the Robinson-Patman Act, 15
U.S.C. S 13a et seq. Unlike that statute, H.R. 1415 and
H.R. 5305 would prohibit essentially all price differences,
even where no anticompetitive effect is observed and without
-7-
regard to other legitimate business justifications recognized
by the Robinson-Patman Act, such as good faith meeting of
competition or the reasonable availability of lower prices to
other customers.
It has been argued by proponents of H.R. 1415 and H.R. 5305
that this legislation is necessary to prohibit manufacturers
from "subsidizing" fleet sales. However, neither bill defines
the term "subsidization" or contains any proposed Congressional
findings as to precisely what conduct is alleged to be
occurring. Accordingly, we are unaware of the specific basis
upon which such a claim has been made. Moreover, any
consideration of so-called "subsidization" requires careful
identification and consideration of the common and overhead
costs associated with producing vehicles for each group of
purchasers, as well as the incremental or marginal costs of
producing for each group. Without going into the technical
complications, subsidization essentially requires that the
group receiving the subsidy is paying less than the incremental
cost of serving it, and that the group providing the subsidy is
paying more than it would pay if the first group were not being
served. Proponents of this legislation have not cited, nor are
we aware of, any evidence that would tend to establish that any
such conduct is occurring. Accordingly, the case for enactment
of this legislation simply has not been made.
-8-
III. The Bills Will Lead To Inefficient Distribution
And Higher Prices For Motor Vehicles
Rather than reflecting any so-called "subsidy" strategy, it
is far more likely that any differences between prices charged
high-volume purchasers and franchised dealers reflect
differences in the relative costs of serving the different sets
of customers. For example, scheduling production, credit,
financing, delivery and road preparation services may be easier
and less costly to provide to high-volume purchasers than to
franchised dealers, thereby offering manufacturers scale and
other economies in their sales to the former group. Second,
recalls and other after-sale services requiring consumer
notification are likely to be simpler and less costly with
respect to high-volume purchasers. These factors can be
expected to reduce manufacturers' costs of dealing with
high-volume purchasers, thus enabling them to sell to such
customers at prices lower than they must charge their other
customers for whom such cost savings are not available.
Moreover, manufacturers' advertising expenditures intended
to generate sales to individual consumers purchasing through
franchised dealers should properly be attributed to vehicles
sold through those dealers and not to vehicles whose sales are
not affected by such advertising. Thus, proper allocation of
advertising and other promotional services may also indicate
that manufacturers' costs of dealing with high-volume
purchasers are lower than their costs of dealing with
-9-
franchised dealers. These examples suggest the range of
potential cost differences in serving the different sets of
vehicle purchasers that are likely to account for any price
differences that may exist. The ability to price in accordance
with such differences is fully consistent with rational sales
who could be expected to gain at the expense of
consumers policies in a competitive environment, and benefits
consumers by providing them the goods and services they desire
at the lowest possible cost.
Our opposition to these bills is not mitigated by the
exceptions they contain to the general rule that
manufacturerers must charge the same prices for similar
vehicles. That general rule will have serious adverse effects,
which will not significantly be alleviated by the bills'
narrow, limited and rigid exceptions. Rather, enactment of
H.R. 1415 or H.R. 5305 would tend to rigidify manufacturer
pricing decisions, and may also make it easier for
manufacturers to collude on prices because price cutting to
particular service outlets would be prohibited by law.
Furthermore, since price differences among service outlets
would not be permitted irrespective of the costs of providing
motor vehicles to those outlets, in situations where the costs
of supplying vehicles differ, competition among manufacturers
must take the form of costly and inefficient service
competition much like that observed in regulated industries
-10-
with fixed rates, such as experienced in the airline industry
prior to deregulation.
I should also point out that enactment of H.R. 1415 or H.R.
5305 will undesirably increase litigation through creation of a
new federal cause of action. Moreover, such litigation is
likely to be expensive, time-consuming and complex due to the
various possible standards for identifying vehicle models and
their respective prices. In addition, manufacturerers faced
with the requirements contained in these bills can be expected
to seek to avoid their effects by further differentiating their
models, particularly in light of the ease with which they could
modify them by altering standard equipment or the options that
are designated as standard. Such attempts will not only further
increase the likelihood of litigation, but will also add to
manufacturers' costs and make the bill largely unenforceable.
IV. Conclusion
Proponents of H.R. 1415 and H.R. 5305 have not shown that
any price discrimination or "subsidization" of fleet purchasers
is occurring, or that consumers are suffering any economic harm
from the present method of sales to commercial and governmental
high-volume purchasers. Rather, the dual distribution system
employed by motor vehicle manufacturers appears to be
efficient, to reflect the costs of dealing with different
classes of customers, and to meet those customers' different
needs at the lowest possible costs. Thus, to impose new, rigid
regulations on manufacturers that would prohibit continuation
-11-
of existing pricing practices that are not alleged to be
unlawful, as these bills would do, is against the public
interest. The bills would destroy an efficient distribution
system, increase costs to consumers and increase government
regulation of private contracts in furtherance of the
franchised dealers' special interest. For all these reasons,
the Department of Justice strongly recommends against enactment
of this legislation.
Mr. Chairman, that concludes my prepared remarks. I would
be happy to respond to any questions that you or other members
of the Committee may have.
-12-
T4-8/831
OMB
HR 530:
U.S. Department of Justice
Blun
HR 1415
Office of Legislative and Intergovernmental Affairs
Office of the Assistant Attorney General
Washington, D.C. 20530
08 JUN 1984
Honorable Peter W. Rodino, Jr.
Chairman
Committee on the Judiciary
House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
This letter responds to your request for the views of the
Department of Justice on H.R. 1415 and H.R. 5305, bills "to
protect consumers and franchised automobile dealers from unfair
price discrimination in the sale by the manufacturer of new motor
vehicles." For the reasons set forth below, the Department of
Justice strongly recommends against enactment of this legislation.
I. Description of the Bills and the Existing Motor
Vehicle Distributional System
Although these bills are similar in that their essential
feature is to prohibit price differentials to different classes
of motor vehicle purchasers, they are different in certain
respects. H.R. 1415 would substantially expand the "Automobile
Dealers' Day in Court Act," 15 U.S.C. 1221 et seq., which governs
certain relations between automobile manufacturers and their
dealers. Section 1 (a) of H.R. 1415 provides that each franchise
agreement between a motor vehicle dealer and manufacturer shall
be deemed to prohibit the manufacturer from: (1) selling or
offering to sell any vehicle to any person (including any other
dealer) during any period of time at a price lower than that
charged to its franchised dealers for the same, similarly
equipped model during the same period of time; (2) imposing or
enforcing any restriction on its dealers not imposed or enforced
against any other purchaser; and (3) providing ultimate
purchasers with any rebate, discount, refund, promotional
service, additional equipment, or any other inducement or benefit
not provided to all other ultimate purchasers of the same model
during the same time period. An exception to prohibition (1)
above permits the manufacturer to sell a vehicle to any person
(including any other dealer) for resale to any unit of federal,
state, or local government, but only if the manufacturer does not
sell or offer to sell the same, similarly equipped model to any
other person for resale to any unit of government at any period
of time at a price lower than that charged to the franchised
dealer.
H.R. 5305, on the other hand, takes a somewhat different
approach to achieve essentially the same result. Section 2 of
that bill provides that no motor vehicle manufacturer may sell or
lease any new vehicle to any person (including a dealer) during
any sales period at a price higher than the lowest price at which
any other vehicle of the same model, similarly equipped, is sold
or leased, or offered for sale or lease, by the manufacturer
during that sales period. Section 3 provides an exception
allowing the manufacturer to sell or lease, or offer to sell or
lease, any new vehicle to (1) a non-dealer employee of the
manufacturer; (2) any department, agency, or instrumentality of
the United States or of a State or local government; or (3) the
American Red Cross. A further exemption in Section 3 permits the
sale or offer to sell any new vehicle to any purchaser, if such
sale or offer to sell by the manufacturer is part of a qualified
regional incentive sales program for a designated region. To
qualify, all vehicles of the same model, similarly equipped, sold
or offered for sale by the manufacturer in the region during the
period, must be sold and offered at the same price, and all
vehicles sold in such region during such period must be delivered
by the manufacturer to the purchaser in such regions.
Both bills would permit persons to bring actions against
motor vehicle manufacturers for damages and injunctive relief
based upon violations of the prohibitions contained in the
respective bills. In addition, H.R. 5305 permits awards of
punitive damages and attorneys fees in the discretion of the
court.
Both bills would substantially alter motor vehicle manufac-
turers' existing relationships with their dealers and the present
distribution system for such vehicles. As such, they appear to
be based upon some belief that the existing distribution system
for motor vehicles is not efficient and is flawed in ways that
ultimately harm consumers. However, it is in the manufacturers'
interest to choose the most efficient distribution system
possible, so as to minimize the costs of distributing motor
vehicles to ultimate consumers and thereby maximize their
profits. Moreover, automobile manufacturers must compete among
themselves for dealers and for sales to ultimate consumers. We
are aware of no evidence that the existing distributional system
is inefficient, nor are we aware of any reasons why manufacturers
would choose an inefficient distribution system.
Currently, manufacturers distribute the great majority of
their motor vehicles to franchised dealers, who provide
particular services as desired by individual consumers and other
low-volume purchasers. Manufacturers alsò distribute some of
-2-
their vehicles directly to high-volume purchasers, such as
governmental units, taxi fleet operators, and rental car
companies, who use those vehicles to provide products or services
to consumers. Information we have seen indicates that, at
present, high-volume sales account for only approximately 20% of
the current motor vehicle market. The remaining 80% of such
sales are made through franchised dealers.
Different groups of vehicle users value particular
distribution services differently and are, therefore, willing to
pay different amounts for those services. Thus, for example, an
individual who desires to purchase an automobile for personal (or
even business) use from a franchised dealer will demand a certain
mix of services. Some of those services will be provided by the
manufacturer (e.g., installation of certain options, warranty
terms, and delivery to the dealer), while other services will be
provided by the dealer (e.g., sales efforts, demonstrators, road
preparation, and repair work under the warranty).
High-volume purchasers, on the other hand, may be willing to
forego certain services or perform them themselves, saving
manufacturers those costs and enabling manufacturers to charge
such purchasers less than the price charged to franchised
dealers. In addition, there may be some benefits to
manufacturers as a result of use of their vehicles by high-volume
purchasers that also benefit franchised dealers. For example,
consumers get valuable information about the operation of
vehicles they rent that may factor in their purchase decisions,
and rental car company advertisements about the cars they lease
likewise benefit both the manufacturers of those cars and their
franchised dealers. If fleet car sales for some reason reduce
the willingness of franchised dealers to provide services that
most consumers want, then the manufacturer will lose sales and
profits and, therefore, will have the incentive to restructure
its fleet sales in a way that ensures that these services will be
provided. The important point, however, is that through whatever
channel the vehicles are distributed, consumers ultimately must
bear the costs of the distribution system as purchasers of
vehicles, as ultimate users of transportation services, and as
taxpayers.
The ability of manufacturers to adjust their charges
according to different services provided enables them to satisfy
the varying demands of their different classes of purchasers at
prices that reflect the costs of the services provided. If, as
we believe, the existing system is efficient, then enactment of
H.R. 1415 or H.R. 5305 may require some customers to pay for
services they do not desire, some to purchase desired services
from a less efficient and more costly system, and others to
forego services for which they would be willing to pay. These
price differences most likely reflect differences in consumer
demands for vehicle services and the costs of providing them
-3-
efficiently. If price differences are no longer permitted fully
to reflect the costs associated with different distribution
methods because of governmental intrusion into existing market
arrangements, then prices will rise to cover the higher-cost
distribution methods. By negating existing efficiencies, these
bills will raise the overall costs of the motor vehicle
distribution system, thereby adversely affecting the interests of
consumers.
An efficient distribution system enables both manufacturers
and dealers to compete most effectively against their respective
rivals and benefits consumers through the lowest possible
prices. Because tailoring a distribution system to the diverse
needs of different classes of customers can have these beneficial
effects, multiple distribution systems frequently exist for other
manufactured goods. For example, products such as appliances and
electronic and photographic equipment are distributed through
service-oriented department stores, as well as through discount
stores and mail-order catalog outlets that provide few, if any,
services. By precluding manufacturers from charging different
classes of purchasers different prices, H.R. 1415 and H.R. 5305
totally ignore the value of services provided and effectively
would destroy the manufacturers' incentives and abilities to
tailor different distributional systems to different needs.
Consumers thereby would be denied the benefits of the most
efficient distribution system for motor vehicles.
II. The Bills Are Unnecessary
Proponents of H.R. 1415 and H.R. 5305 have labeled them as
bills to prevent "unfair price discrimination." We are not aware
that any price discrimination is occurring, and hence, we believe
this characterization to be erroneous. Price discrimination
occurs when prices charged do not reflect the costs of doing
business with particular customers or groups of customers. Thus,
price discrimination may occur when different prices are charged
to persons for whom the cost of doing business is the same;
conversely, it may occur when the same price is charged to
persons for whom the costs of doing business are different.
Because proponents of these bills have not shown that any
differences in prices charged do not reflect the different costs
of doing business with franchised dealers and high-volume
purchasers, the existence of price discrimination has not been
established. Even if there were some price differences not fully
accountable by cost differences among different customer classes,
these bills unnecessarily go far beyond existing prohibitions
against price discrimination as prohibited by the Robinson-Patman
Act, 15 U.S.C. $ 13a et seq. Unlike that statute, H.R. 1415 and
H.R. 5305 would prohibit essentially all price differences, even
where no anticompetitive effect is observed and without regard to
other legitimate business justifications recognized by the
Robinson-Patman Act, such as good faith meeting of competition or
the reasonable availability of lower prices to other customers.
-4-
It has been argued by proponents of H.R. 1415 and H.R. 5305
that this legislation is necessary to prohibit manufacturers from
"subsidizing" fleet sales. However, neither bill defines the
term "subsidization" or contains any proposed Congressional
findings as to precisely what conduct is alleged to be
occurring. Accordingly, we are unaware of the specific basis
upon which such a claim has been made. Moreover, any
consideration of so-called "subsidization" requires careful
identification and consideration of the common and overhead costs
associated with producing vehicles for each group of purchasers,
as well as the incremental or marginal costs of producing for
each group. Without going into the technical complications,
subsidization essentially requires that the group receiving the
subsidy is paying less than the incremental cost of serving it,
and that the group providing the subsidy is paying more than it
would pay if the first group were not being served. Proponents
of this legislation have not cited, nor are we aware of, any
evidence that would tend to establish that any such conduct is
occurring. Accordingly, the case for enactment of this
legislation simply has not been made.
III. The Bills Will Lead To Inefficient Distribution
And Higher Prices For Motor Vehicles
Rather than reflecting any so-called "subsidy" strategy, it
is far more likely that any differences between prices charged
high-volume purchasers and franchised dealers reflect differences
in the relative costs of serving the different sets of
customers. For example, scheduling production, credit,
financing, delivery and road preparation services may be easier
and less costly to provide to high-volume purchasers than to
franchised dealers, thereby offering manufacturers scale and
other economies in their sales to the former group. Second,
recalls and other after-sale services requiring consumer
notification are likely to be simpler and less costly with
respect to high-volume purchasers. These factors can be expected
to reduce manufacturers' costs of dealing with high-volume
purchasers, thus enabling them to sell to such customers at
prices lower than they must charge their other customers for whom
such cost savings are not available.
Moreover, manufacturers' advertising expenditures intended to
generate sales to individual consumers purchasing through
franchised dealers should properly be attributed to vehicles sold
through those dealers and not to vehicles whose sales are not
affected by such advertising. Thus, proper allocation of
advertising and other promotional services may also indicate that
manufacturers' costs of dealing with high-volume purchasers are
lower than their costs of dealing with franchised dealers. These
examples suggest the range of potential cost differences in
serving the different sets of vehicle purchasers that are likely
to account for any price differences that may exist. The ability
-5-
to price in accordance with such differences is fully consistent
with rational sales policies in a competitive environment, and
benefits consumers by providing them the goods and services they
desire at the lowest possible cost.
Our opposition to these bills is not mitigated by the
exceptions they contain to the general rule that manufacturers
must charge the same prices for similar vehicles. That general
rule will have serious adverse effects, which will not
significantly be alleviated by the bills' narrow, limited and
rigid exceptions. Rather, enactment of H.R. 1415 or H.R. 5305
would tend to freeze manufacturer pricing decisions and may also
make it easier for manufacturers to collude on prices because
price cutting to particular service outlets would be prohibited
by law. Furthermore, since price differences among service
outlets would not be permitted irrespective of the costs of
providing motor vehicles to those outlets, in situations where
the costs of supplying vehicles differ, competition among
manufacturers must take the form of costly and inefficient
service competition much like that observed in regulated
industries with fixed rates, such as experienced in the airline
industry prior to deregulation.
I should also point out that enactment of H.R. 1415 or
H.R. 5305 will undesirably increase litigation through creation
of a new federal cause of action. Moreover, such litigation is
likely to be expensive, time-consuming and complex due to the
various possible standards for identifying vehicle models and
their respective prices. In addition, manufacturers faced with
the requirements contained in these bills can be expected to seek
to avoid their effects by further differentiating their models,
particularly in light of the ease with which they could modify
them by altering standard equipment or the options that are
designated as standard. Such attempts will not only further
increase the likelihood of litigation but will also add to
manufacturers' costs and make the bill largely unenforceable.
IV. Conclusion
Proponents of H.R. 1415 and H.R. 5305 have not shown that any
price discrimination or "subsidization" of fleet purchasers is
occurring, or that consumers are suffering any economic harm from
the present method of sales to commercial and governmental
high-volume purchasers. Rather, the dual distribution system
employed by motor vehicle manufacturers appears to be efficient,
to reflect the costs of dealing with different classes of
customers, and to meet those customers' different needs at the
lowest possible costs. Thus, to impose new, rigid regulations on
manufacturers that would prohibit continuation of existing
pricing practices that are not alleged to be unlawful, as these
bills would do, is against the public interest. The bills would
destroy an efficient distribution system, increase costs to
-6-
consumers and increase government regulation of private
contracts. For all these reasons, the Department of Justice
strongly recommends against enactment of this legislation.
The Office of Management and Budget has advised this
Department that there is no objection to the submission of this
report from the standpoint of the Administration's Program.
Sincerely,
(Signed Robert A. McConnel
Robert A. McConnell
Assistant Attorney General
Final
DEPARTMENT OF COMMERCE
HE
5305,
HR 1415
GENERAL COUNSEL OF THE
UNITED STATES DEPARTMENT OF COMMERCE
UNITED STATES OF AMERICA
Washington, D.C. 20230
JUL 17 1984
Honorable John D. Dingell
Chairman, Committee on Energy
and Commerce
U.S. House of Representatives
Washington, D.C.- 20515
Dear Mr. Chairman:
This is in response to your request for the views of the Department
of Commerce concerning H.R. 5305, a bill
"To protect consumers and franchised automobile dealers from
unfair price discrimination in the sale by the manufacturer
of new motor vehicles."
H.R. 5305 would prohibit an automobile manufacturer from selling
or leasing any new automobile, or offering to sell or lease any
new automobile, to any person (including an automobile dealer) at
a price that is higher than the lowest price for which any other
automobile of the same model is sold or offered during a
particular sales period. The bill would provide exceptions for
sales to employees of an automobile manufacturer, agencies of the
United States or any state or local government, the American
Red Cross, and sales under regional sales incentive programs. The
prohibitions in the bill would be enforceable by private action.
The Department of Commerce opposes enactment of H.R. 5305. The
legislation effectively would prohibit marketing practices that
vehicle manufacturers and their fleet customers have found highly
efficient and mutually beneficial. By requiring that the
"lowest price" be the only selling price for a vehicle,
H.R. 5305 would, despite its avowed intention to protect consumers
and automobile dealers against "unfair price competition, = be
anti-competitive.
H.R. 5305 would eliminate or reduce competition in the fleet sales
market by prohibiting large volume fleet purchase discounts. We
believe that large volume fleet purchasers should be allowed to
negotiate with manufacturers for lower prices. Fleet sales are an
important factor in automobile manufacturing. Automobile companies
can offer discounts on direct volume sales because such sales
help reduce the per vehicle cost of manufacturing and thereby
increase overall profits without raising prices to dealers. Fleet
sales are often made in advance of initial vehicle production and
thereby encourage the marketing of new products.
-2-
We have been advised by the Office of Management and Budget that
there is no objection to the submission of this letter to the
Congress from the standpoint of the Administration's position.
Sincerely,
thing
Irving P. Marqulies
General Counsel
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
ROUTE SLIP
Take necessary action
TO
John Roberts
Approval or signature
Comment
Prepare reply
Discuss with me
For your information
See remarks below
FROM
Branden Blum
BB
DATE 9/17/84
REMARKS
H.R. 1415 and H.R. 5305, bills to
protect consumers and franchised auto-
mobile dealers from unfair price
discrimination in the sale by
manufacturers of new motor vehicles
Per your request attched are copies of
agency reports or testimony on the bills.
I will forward to you upon receipt a copy
of the signed Commerce report opposing
S. 2770.
OMB FORM 4
Rev Aug 70
APPROVED
Statement of Barbara A. Clark
Deputy Director
Bureau of Competition
Federal Trade Commission
before the
Subcommittee on Commerce,
Transportation and Tourism
United States House of Representatives
June 7, 1984
Mr. Chairman, members of the subcommittee. Thank you for
the opportunity to comment on H.R. 5305, a bill intended to
protect consumers and franchised automobile dealers from unfair
price discrimination in the sale of new motor vehicles by
manufacturers. H.R. 5305 is a successor to H.R. 1415. While the
bills address many of the same issues, H.R. 5305 is in part a
reaction to Federal Trade Commission criticisms of H.R. 1415.
While we appreciate the attempt to meet some of our concerns, we
still have fundamental problems with the proposed legislation.
Essentially, H.R. 5305 requires a car manufacturer to sell
(or lease) all similarly equipped cars of the same model to all
direct purchasers, including dealers, at the same price. Where a
manufacturer gives rebates or other benefits to indirect
purchasers, the manufacturer's price to the direct purchasers
generally cannot be higher than the effective price to the
indirect purchasers.
I believe an analysis of the key provisions in H.R. 5305
reveals that this bill, like its predecessor, should not be
enacted into law. In fact, this bill raises some legal problems
not present in the earlier bill in addition to the probable
anticompetitive consequences we pointed out in our comments on
H.R. 1415. I would like to briefly discuss our concerns with the
specific sections of the bill.
Section 1: Definitions
A major definitional problem occurs in Section 1(5), which
defines "sales period" as "any period of time during which a new
automobile is sold or leased" at a specified price. This is the
period to which the court would look to determine whether
discriminatory prices are being offered in violation of Section
2. Section 1(5) may undermine the whole bill in large part
because this section could be read to mean that the pertinent
sales period ends as soon as a different price is instituted.
Under this interpretation, a car manufacturer's new lower price
to one purchaser could not violate Section 2, because the
manufacturer's lower price institutes a new sale period, which
terminates as soon as the manufacturer charges a new price to
someone else. Although courts would try to interpret the law so
that it would not be a nullity, they would have a difficult time
determining what is meant by Section 1(5).
Section 1(6), with its broad "any
...
inducement or
benefit" language, coupled with Section 2, presumably would end
the manufacturers' present practice of delivering cars directly
to large-volume purchasers. It would also presumably eliminate
numerous other practices by which manufacturers presently
-2-
differentiate between consumers purchasing one car at a time and
firms (such as automobile rental and leasing firms) purchasing
thousands of cars each year. Thus, manufacturers would be
inhibited from, for example, passing along savings in selling or
delivery costs to large-volume purchasers.
Finally, Section 1(2) defines "automobile manufacturer" so
broadly that it would potentially subject to liability companies
totally unconnected to the manufacture of automobiles.
Section 2
Section 2, the heart of the bill, would outlaw price
differences. Unlike the Robinson-Patman Act, this section does
not allow for a cost-justification or meeting competition
defense, typically used in price discrimination cases. There is
no requirement that a dealer who pays a higher price than anyone
else be injured by the price difference. In fact, there is no
requirement that the dealer be in competition with the favored
purchaser. Thus, a Hawaii dealer could win a price
discrimination case because it paid a higher price for a certain
car than a Michigan dealer located near the factory or than a
Pennsylvania office supply firm purchasing cars for its salesmen.
Section 2 poses other problems. Couched in terms of "sell
or lease," it could be read to prohibit a car manufacturer from
selling a car to one person for a different price than the
manufacturer's lease price to another person. In other words,
the sales price and lease price of a particular type car may have
-3-
to be identical. This requirement could damage or end leasing
programs that the public currently finds to be a worthwhile
alternative to buying.
Section 3: Exceptions
Section 3 is an attempt to exempt sales at discriminatory
prices to, among others, car factory workers, government
agencies, and the American Red Cross. By restricting special
treatment to these groups only, the bill would make it difficult
for car manufacturers to modify their car distribution systems in
the future to achieve more direct sales to non-dealers at
competitive prices. Moreover, there is a non-profit institution
exemption to the Robinson-Patman Act that is considerably broader
than the exemption contained in H.R. 5305. There is no apparent
reason for the Red Cross, as opposed to any other charitable
organization, to be singled out for favorable treatment.
Section 4: Enforcement
Section 4, the enforcement section, could well subsidize
barely-injured plaintiffs (and countless lawyers). Under this
section, "[a]ny person may bring action
...
to require
compliance" and seek punitive damages. The section does not
require that the plaintiff be injured or that he even be a car
purchaser. Section 4 goes considerably beyond the treble-damage
remedy of the antitrust laws, since a plaintiff can recover the
-4-
amount of his injury many times over and plaintiffs need not even
be injured, in an economic sense, to collect damages.
Under Section 4, if a manufacturer favored Hertz Corporation
by giving it a $500 rebate on each of 60,000 cars purchased by
Hertz, a dealer or other plaintiff could sue for punitive
damages. The court would have discretion whether to grant the
damages; however, if the court does decide in favor of damages,
it "shall take into account" under Section 4 (a) (3) the amount of
the rebate times those 60,000 cars. Thus, injured (or uninjured)
plaintiffs in the Hertz situation might be allowed to recover up
to $30,000,000. Complications will inevitably result because the
courts are given no direction on the limits of the damages that
could be awarded or on proper damage apportionment. Any windfall
damages defendant car manufacturers pay to uninjured plaintiffs
may well be recouped at a later date through higher car prices to
consumers.
Conclusion
The preceding analysis suggests a number of defects that
make effective enforcement of H.R. 5305 problematic. In contrast
to the proposed bill, the Robinson-Patman and Federal Trade
Commission Acts are fully-formed statutes with established
interpretations that are sufficient to handle the anticompetitive
price discrimination problems this legislation is intended to
address.
-5-
Even assuming that the bill's many serious interpretational
problems are resolved, enactment of the bill may have
anticompetitive consequences. For example, because the bill
departs radically from traditional price discrimination law,
lawful competitive price cuts and entry into new markets may be
deterred. Manufacturers may fear testing the legal waters and
may reasonably feel that the cost of litigation, even if
successful, would be greater than the benefits of granting
permissible discounts.
Next, discounts made to meet competition may help bring down
high, "sticky" list prices in oligopolistic industries. A seller
is particularly susceptible to hard bargaining from a variety of
sources when the seller believes the buyer has gotten a special
discount from one of the seller's competitors. Once price
concessions are made, they will most likely become known
throughout the industry and others will demand the same
discount. Eventually, the high list price structure breaks down.
In addition, the bill may encourage the manufacture of
automobiles that contain accessories not desired by consumers.
The price discrimination prohibition in the act applies only to
:
"similarly equipped" automobiles. A manufacturer wishing to
evade the rigid confines of the act could market the most
desirable autos to some buyers and then differentiate the product
in some spurious way to other buyers. While product
differentiation used as an evasion tactic is also possible under
-6-
the Robinson-Patman Act the bill under consideration leaves so
little room for price differences (i.e., no cost justifications
or meeting competition defenses are allowed) that manufacturers
will be more likely to resort to devices to circumvent the law.
H.R. 5305, if enacted into law, can be expected to result in
higher prices for consumers, price rigidity, or both. It would
also inhibit car manufacturers from instituting pro-competitive
and cost-justified changes in their pricing and car distribution
systems. To the extent that price discrimination in automobile
sales is causing significant competitive injury, the Robinson-
Patman and Federal Trade Commission Acts provide better means for
dealing with the problem Moreover, those Acts have well-known
contours, whereas H.R. 5305 takes discrimination law into
uncharted (and possibly dangerously anticompetitive) territory.
The Commission therefore opposes enactment of this bill.
I will be happy to answer any questions you may have.
1/
That Act applies to the sale of commodities of like grade and
quality.
2/
In response to an inquiry by Rep. Florio, the Chairman
recently transmitted to the Bureau of Competition for further
investigation and analysis allegations of unfair practices of
a type that H.R. 5305 is intended to address.
-7-
SEPARATE STATEMENT OF COMMISSIONER PERTSCHUK
CONCERNING H.R. 5305
June 6, 1984
I agree with most of the points made in the Commission's
statement, but I wish to add two others. First, a significant
issue relating to the need for H.R. 5305 is whether harmful price
discrimination that is not technically prohibited by the
Robinson-Patman Act can still be addressed under the FTC Act. I
believe that the answer is certainly yes if the conduct falls
within the standards of Grand Union Co. and related cases. 1/
Unfortunately, the majority declined to state this principle
expressly in the testimony even though they were requested to do
SO. Consequently, the Committee may wish to question the
Commission's representative on this point.
Second, the statement repeats the proposition included in
the Commission's earlier letter to the Committee on H.R. 5305:
"To the extent that price discrimination in automobile sales is
causing competitive injury, the Robinson-Patman and Federal Trade
Commission Acts provide better means for dealing with the
problem." As I said in my separate statement accompanying that
letter, this point only has meaning if the Robinson-Patman Act
and analogous principles under the Federal Trade Commission Act
are enforced. Not only has the current Commission failed to
bring any new price discrimination cases during the entire period
1/ Grand Union Co. V. FTC, 300 F.2d 92 (2d Cir. 1962).
of the administration, while nevertheless professing a commitment
to enforcement in this area, the senior staff recently
recommended closing two major investigations despite good
indications that violations have occurred. In one case, the
Bureau is apparently pursuing settlement negotiations, though the
ultimate result is uncertain. In the other case, I moved in
August 1983. to reject the Bureau's recommendation and to complete
the investigation. Nevertheless the motion remains "on hold"
because all Commissioners have still not voted.
Even more remarkably, perhaps, the current Commission
periodically claims that Robinson-Patman Act enforcement has not
diminished. While I admire the sheer exuberance of this
denial of reality, the facts are that the only price
discrimination orders issued by the Commission have been
settlements of cases brought prior to this administration.
Although the Chairman points frequently to the large number of
investigations that are recorded as technically active on our
computer lists, so far none of these investigations has resulted
in an enforcement action.
2/ "[T]he Commission's current Robinson-Patman enforcement
priorities are consistent with the trends and lessons of the
last decade.
We definitely have not abandoned
enforcement of the Robinson-Patman Act." Testimony of
Chairman Miller to the Subcommittee on Commerce,
Transportation and Tourism of the House Committee on Energy
and Commerce, February 22, 1984, P. 5. "During the past four
administrations, [Commissioner] Calvani observed, public
sector Robinson-Patman Act enforcement has not changed
appreciably." Antitrust and Trade Regulation Report, May 24,
1984, P. 1007.
-2-
DEPARTMENT
HR 1415
Final
OF
Department of Justice
HR SATS 5305
Branden
STATEMENT OF
CHARLES F. RULE
DEPUTY ASSISTANT ATTORNEY GENERAL
ANTITRUST DIVISION
BEFORE THE
SUBCOMMITTEE ON COMMERCE, TRANSPORTATION
AND TOURISM
COMMITTEE ON ENERGY AND COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
CONCERNING
PRICE DIFFERENTIALS TO DIFFERENT CLASSES OF PURCHASERS
OF NEW MOTOR VEHICLES AND H.R. 1415 AND H.R. 5305,
BILLS "TO PROTECT CONSUMERS AND FRANCHISED
AUTOMOBILE DEALERS FROM UNFAIR PRICE DISCRIMINATION
IN THE SALE BY THE MANUFACTURER OF NEW MOTOR VEHICLES"
ON
JUNE 7, 1984
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to provide you with the
views of the Department of Justice on H.R. 1415 and H.R. 5305,
bills "to protect consumers and franchised automobile dealers
from unfair price discrimination in the sale by the manufacturer
of new motor vehicles." For the reasons I will discuss, the
Department of Justice strongly recommends against enactment of
this legislation.
I.
Description of the Bills and the Existing Motor
Vehicle Distributional System
Although these bills are similar in that their essential
feature is to prohibit price differentials to different classes
of motor vehicle purchasers, they are different in certain
respects. H.R. 1415 would substantially expand the "Automobile
Dealers' Day in Court Act," 15 U.S.C. 1221 et seq., which governs
certain relations between automobile manufacturers and their
dealers. Section 1 (a) of H.R. 1415 provides that each franchise
agreement between a motor vehicle dealer and manufacturer shall
be deemed to prohibit the manufacturer from: (1) selling or
offering to sell any vehicle to any person (including any other
dealer) during any period of time at a price lower than that
charged to its franchised dealers for the same, similarly
equipped model during the same period of time; (2) imposing or
enforcing any restriction on its dealers not imposed or enforced
against any other purchaser; and (3) providing ultimate
purchasers with any rebate, discount, refund, promotional
service, additional equipment, or any other inducement or benefit
not provided to all other ultimate purchasers of the same model
during the same time period. An exception to prohibition (1)
above permits the manufacturer to sell a vehicle to any person
(including any other dealer) for resale to any unit of federal,
state, or local government, but only if the manufacturer does not
sell or offer to sell the same, similarly equipped model to any
other person for resale to any unit of government at any period
of time at a price lower than that charged to the franchised
dealer.
H.R. 5305, on the other hand, takes a somewhat different
approach to achieve essentially the same result. Section 2 of
that bill provides that no motor vehicle manufacturer may sell or
lease any new vehicle to any person (including a dealer) during
any sales period at a price higher than the lowest price at which
any other vehicle of the same model, similarly equipped, is sold
or leased, or offered for sale or lease, by the manufacturer
during that sales period. Section 3 provides an exception
allowing the manufacturer to sell or lease, or offer to sell or
lease, any new vehicle to (1) a non-dealer employee of the
manufacturer: (2) any department, agency, or instrumentality of
the United States or of a State or local government; or (3) the
American Red Cross. A further exemption in Section 3 permits the
sale or offer to sell any new vehicle to any purchaser, if such
-2-
sale or offer to sell by the manufacturer is part of a qualified
regional incentive sales program for a designated region. To
qualify, all vehicles of the same model, similarly equipped, sold
or offered for sale by the manufacturer in the region during the
period, must be sold and offered at the same price, and all
vehicles sold in such region during such period must be delivered
by the manufacturer to the purchaser in such regions.
Both bills would permit persons to bring actions against motor
vehicle manufacturers for damages and injunctive relief based upon
violations of the prohibitions contained in the respective bills.
In addition, H.R. 5305 permits awards of punitive damages and
attorneys fees in the discretion of the court.
Both bills would substantially alter motor vehicle manufac-
turers' existing relationships with their dealers and the present
distribution system for such vehicles. As such, they appear to be
based upon some belief that the existing distribution system for
motor vehicles is not efficient and is flawed in ways that
ultimately harm consumers. However, it is in the manufacturers'
interest to choose the most efficient distribution system
possible, so as to minimize the costs of distributing motor
vehicles to ultimate consumers and thereby maximize their
profits. Moreover, automobile manufacturers must compete among
themselves for dealers and for sales to ultimate consumers. We
are aware of no evidence that the existing distributional system
is inefficient, nor are we aware of any reasons why manufacturers
would choose an inefficient distribution system.
-3-
Currently, manufacturers distribute the great majority of
their motor vehicles to franchised dealers, who provide
particular services as desired by individual consumers and
other low-volume purchasers. Manufacturers also distribute
some of their vehicles directly to high-volume purchasers, such
as governmen*al units, taxi fleet operators, and rental car
companies, who use those vehicles to provide products or
services to consumers. Information we have seen indicates
that, at present, high-volume sales account for only
approximately 20% of the current motor vehicle market. The
remaining 80% of such sales are made through franchised
dealers.
Different groups of vehicle users value particular
distribution services differently and are, therefore, willing
to pay different amounts for those services. Thus, for
example, an individual who desires to purchase an automobile
for personal (or even business) use from a franchised dealer
will demand a certain mix of services. Some of those services
will be provided by the manufacturer (e.g., installation of
certain options, warranty terms, and delivery to the dealer),
while other services will be provided by the dealer (e.g.,
sales efforts, demonstrators, road preparation, and repair work
under the warranty).
High-volume purchasers, on the other hand, may be willing
to forego certain services or perform them themselves, saving
manufacturers those costs and enabling manufacturers to charge
-4-
such purchasers less than the price charged to franchised
dealers. In addition, there may be some benefits to
manufacturers as a result of use of their vehicles by
high-volume purchasers that also benefit franchised dealers.
For example, consumers get valuable information about the
operation of vehicles they rent that may factor in their
purchase decisions, and rental car company advertisements about
the cars they lease likewise benefit both the manufacturers of
those cars and their franchised dealers. If fleet car sales
for some reason reduce the willingness of franchised dealers to
provide services that most consumers want, then the
manufacturer will lose sales and profits and, therefore, will
have the incentive to restructure its fleet sales in a way that
ensures that these services will be provided. The important
point, however, is that through whatever channel the vehicles
are distributed, consumers ultimately must bear the costs of
the distribution system as purchasers of vehicles, as ultimate
users of transportation services, and as taxpayers.
The ability of manufacturers to adjust their charges
according to different services provided enables them to
satisfy the varying demands of their different classes of
purchasers at prices that reflect the costs of the services
provided. If, as we believe, the existing system is efficient,
then enactment of H.R. 1415 or H.R. 5305 may require some
customers to pay for services they do not desire, some to
-5-
purchase desired services from a less efficient and more costly
system, and others to forego services for which they would be
willing to pay. These price differences most likely reflect
differences in consumer demands for vehicle services and the
costs of providing them efficiently. If price differences are
no longer permitted fully to reflect the costs associated with
different distribution methods because of governmental
intrusion into existing market arrangements, then prices will
rise to cover the higher-cost distribution methods. By
negating existing efficiencies, these bills will raise the
overall costs of the motor vehicle distribution system, thereby
adversely affecting the interests of consumers.
An efficient distribution system enables both manufacturers
and dealers to compete most effectively against their
respective rivals and benefits consumers through the lowest
possible prices. Because tailoring a distribution system to
the diverse needs of different classes of customers can have
these beneficial effects, multiple distribution systems
frequently exist for other manufactured goods. For example,
products such as appliances and electronic and photographic
equipment are distributed through service-oriented department
stores, as well as through discount stores and mail-order
catalog outlets that provide few, if any, services. By
precluding manufacturers from charging different classes of
purchasers different prices, H.R. 1415 and H.R. 5305 totally
-6-
ignore the value of services provided and effectively would
destroy the manufacturers' incentives and abilities to tailor
different distributional systems to different needs. Consumers
thereby would be denied the benefits of the most efficient
distribution system for motor vehicles.
II. The Bills Are Unnecessary
Proponents of H.R. 1415 and H.R. 5305 have labeled them as
bills to prevent "unfair price discrimination." We are not
aware that any price discrimination is occurring, and hence, we
believe this characterization to be erroneous. Price
discrimination occurs when prices charged do not reflect the
costs of doing business with particular customers or groups of
customers. Thus, price discrimination may occur when different
prices are charged to persons for whom the cost of doing
business is the same; conversely, it may occur when the same
price is charged to persons for whom the costs of doing
business are different. Because proponents of these bills have
not shown that any differences in prices charged do not reflect
the different costs of doing business with franchised dealers
and high-volume purchasers, the existence of price
discrimination has not been established. Even if there were
some price differences not fully accountable by cost
differences among different customer classes, these bills
unnecessarily go far beyond existing prohibitions against price
-7-
discrimination as prohibited by the Robinson-Patman Act, 15 U.S.C.
S 13a et seq. Unlike that statute, H.R. 1415 and H.R. 5305 would
prohibit essentially all price differences, even where no anticom-
petitive effect is observed and without regard to other legitimate
business justifications recognized by the Robinson-Patman Act,
such as good faith meeting of competition or the reasonable
availability of lower prices to other customers.
It has been argued by proponents of H.R. 1415 and H.R. 5305
that this legislation is necessary to prohibit manufacturers from
"subsidizing" fleet sales. However, neither bill defines the term
"subsidization" or contains any proposed Congressional findings as
to precisely what conduct is alleged to be occurring. Accordingly,
we are unaware of the specific basis upon which such a claim has
been made. Moreover, any consideration of so-called "subsi-
dization" requires careful identification and consideration of the
common and overhead costs associated with producing vehicles for
each group of purchasers, as well as the incremental or marginal
costs of producing for each group. Without going into the
technical complications, subsidization essentially requires that
the group receiving the subsidy is paying less than the incremental
cost of serving it, and that the group providing the subsidy is
paying more than it would pay if the first group were not being
served. Proponents of this legislation have not cited, nor are we
aware of, any evidence that would tend to establish that any such
conduct is occurring. Accordingly, the case for enactment of this
legislation simply has not been made.
-8-
III. The Bills Will Lead To Inefficient Distribution
And Higher Prices For Motor Vehicles
Rather than reflecting any so-called "subsidy" strategy, it is
far more likely that any differences between prices charged
high-volume purchasers and franchised dealers reflect differences
in the relative costs of serving the different sets of customers.
For example, scheduling production, credit, financing, delivery
and road preparation services may be easier and less costly to
provide to high-volume purchasers than to franchised dealers,
thereby offering manufacturers scale and other economies in their
sales to the former group. Second, recalls and other after-sale
services requiring consumer notification are likely to be simpler
and less costly with respect to high-volume purchasers. These
factors can be expected to reduce manufacturers' costs of dealing
with high-volume purchasers, thus enabling them to sell to such
customers at prices lower than they must charge their other
customers for whom such cost savings are not available.
Moreover, manufacturers' advertising expenditures intended to
generate sales to individual consumers purchasing through
franchised dealers should properly be attributed to vehicles sold
through those dealers and not to vehicles whose sales are not
affected by such advertising. Thus, proper allocation of
advertising and other promotional services may also indicate that
manufacturers' costs of dealing with high-volume purchasers are
lower than their costs of dealing with franchised dealers. These
examples suggest the range of potential cost differences in
-9-
serving the different sets of vehicle purchasers that are likely
to account for any price differences that may exist. The ability
to price in accordance with such differences is fully consistent
with rational sales policies in a competitive environment, and
benefits consumers by providing them the goods and services they
desire at the lowest possible cost.
Our opposition to these bills is not mitigated by the
exceptions they contain to the general rule that manufacturers
must charge the same prices for similar vehicles. That general
rule will have serious adverse effects, which will not
significantly be alleviated by the bills' narrow, limited and
rigid exceptions. Rather, enactment of H.R. 1415 or H.R. 5305
would tend to freeze manufacturer pricing decisions and may also
make it easier for manufacturers to collude on prices because
price cutting to particular service outlets would be prohibited by
law. Furthermore, since price differences among service outlets
would not be permitted irrespective of the costs of providing
motor vehicles to those outlets, in situations where the costs of
supplying vehicles differ, competition among manufacturers must
take the form of costly and inefficient service competition much
like that observed in regulated industries with fixed rates, such
as experienced in the airline industry prior to deregulation.
I should also point out that enactment of H.R. 1415 or
H.R. 5305 will undesirably increase litigation through creation of
a new federal cause of action. Moreover, such litigation is
-10-
likely to be expensive, time-consuming and complex due to the
various possible standards for identifying vehicle models and
their respective prices. In addition, manufacturers faced with
the requirements contained in these bills can be expected to seek
to avoid their effects by further differentiating their models,
particularly in light of the ease with which they could modify
them by altering standard equipment or the options that are
designated as standard. Such attempts will not only further
increase the likelihood of litigation but will also add to
manufacturers' costs and make the bill largely unenforceable.
IV. Conclusion
Proponents of H.R. 1415 and H.R. 5305 have not shown that any
price discrimination or "subsidization" of fleet purchasers is
occurring, or that consumers are suffering any economic harm from
the present method of sales to commercial and governmental
high-volume purchasers. Rather, the dual distribution system
employed by motor vehicle manufacturers appears to be efficient,
to reflect the costs of dealing with different classes of
customers, and to meet those customers' different needs at the
lowest possible costs. Thus, to impose new, rigid regulations on
manufacturers that would prohibit continuation of existing pricing
practices that are not alleged to be unlawful, as these bills
would do, is against the public interest. The bills would destroy
an efficient distribution system, increase costs to consumers and
increase government regulation of private contracts. For all
-11-
increase government regulation of private contracts. For all
these reasons, the Department of Justice strongly recommends
against enactment of this legislation.
Mr. Chairman, that concludes my prepared remarks. I would be
happy to respond to any questions that you or other members of the
Subcommittee may have.
DOJ-1984-06
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OFFINE
AMERICAN
Washington, D.C. 20230
STATES
of
JAN 10 1984,
Honorable James J. Florio
Chairman, Subcommittee on Commerce,
Transportation and Tourism
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
The Department of Commerce has reviewed H.R. 1415, a bill
"To protect franchised automobile dealers from
unfair price discrimination in the sale by the
manufacturer or importer of new motor vehicles, 11
and we hereby submit our views on the legislation.
Under H.R. 1415, an automobile manufacturer would be prohibited
from (a) selling or leasing any passenger car, truck or station
wagon to any person at a price lower than that accorded to its
franchised dealers; (b) imposing upon a dealer any restrictions
that are not imposed upon all other purchasers; and (c) providing
to a purchaser any rebate or discount that is not provided to all
purchasers. In addition, a manufacturer would be unable to sell a
vehicle to any person for resale to a unit of federal, state or
local government at a price which is lower than the price at which
the vehicle is sold to a dealer during the same period for resale
to a unit of government.
We oppose enactment of H.R. 1415. Despite its avowed intention
to provide protection against "unfair price discrimination, 11 in
reality the bill would prohibit marketing practices that vehicle
manufacturers and their fleet customers have found highly
efficient and mutually beneficial. We believe H.R. 1415 is
anti-competitive and designed to benefit the special interests of
franchised automobile dealers at the expense of American
consumers.
H.R. 1415 would eliminate competition in the fleet sales market by
prohibiting large volume fleet purchasers, including the federal
government, from negotiating with automobile manufacturers for
lower prices. We believe that large volume fleet purchasers,
Prepared by: OAGC/L Lisa Lindeman 377-1328
bee: EA (C. Miller)
IPM Chron
GC Chron
File H.R. 1415
Lisa Lindeman
2
including the federal government, should be allowed to negotiate
with manufacturers for lower prices in order to enhance
competition and encourage efficient allocation of resources.
We understand that the Department of Justice is opposed to the
bill because it would prohibit discounts on direct sales by
manufacturers both to governmental and commercial fleet purchasers,
and that the Department intends to submit a report outlining its
opposition to the bill which will focus on its undesirable effects.
We have been advised by the Office of Management and Budget
that there is no objection to the submission of this letter
to the Congress from the standpoint of the Administration's
position.
Sincerely,
thing Mayales
Irving P. Margulies
Acting General Counsel