us-ftc-advocacy-filings-0b13c809284b15e3c0c8a067ca86d016•FTC Staff Comment to the Hon. Lynn Adelman Concerning Wisconsin S.B. 47 to Repeal Auto Dealer Relevant Market Area Law
FTC Staff Comment to the Hon. Lynn Adelman Concerning Wisconsin S.B. 47 to Repeal Auto Dealer Relevant Market Area Law
us-ftc-advocacy-filings-0b13c809284b15e3c0c8a067ca86d016FTC Staff Comment to the Hon. Lynn Adelman Concerning Wisconsin S.B. 47 to Repeal Auto Dealer Relevant Market Area LawAdvocacy Filing
~1U1 a.st..t~~ ~. IJ.IOia 60603 ...,... Code 312353·1'1[,6 P'l.D£R.AL TRADt COMMISSION Chiaro R.egoionaJ omce .June 19, 1987 The Honorable Lynn Ade1mc.n cnairman, ~ud1ciary , Consumer - , At fa i re Committee WiQconein State Senate State Capitol P.O. Box 7882 ~dison, WI 53707-7862 Dear Mr. Chairaans The staf! of the Federal Trade Commission is pleased to have the oPpoitunity to respond to your request for comments on Senate Bill 47. In essence, the bill would remove the portions of Wis. Stat.: S 218.01 (1985-86) that provide existing retail automobile dealers with adainistrative avenues for challenging the estab- lishment or relocation of other dealerships within their relevant market area I. These are hereinafter referred- to as the "RMA laws·. As' we discuss below, we believe that the existing RMA laws inhibit co.pet1tlon and, in 80 doing, may raise costs for. consumers. We therefore support the passage of SB 47. By removing restrictione on competition, S5 47 may result in lower automobile prices for consumers. We are also taking this opportunity to comment on two other provisions of 5 218.01 th~t we believe also may raise consumer coste. The Federal Trade Commission is charged by the United States Congress with maintaining 2 com p etition and protecting consumer~ from restraints of trade. In accordance with this role, the Commission and its staff submit co~ente upon request to federal, state, and local governmental bodies to help assess the competitive and consumer welfare implications of pending policy issues. 1 2 These comments represent the views of the Cbicago Regional Office and the Bureaus of Competition, Consumer PTotection, and Economics of the Federal Trade Commission and do not necessarily represent the views of the Federal Trade Commission or any Incividual Commi8~ioner. The Fede~~l ~rade Commission, however, has voted to authorl%e the sub~ia8ion of thesG comments. See 15 U.S.C. S 41 et ~eq. --~.- -_., --- - --- ---.-:, .,....-.......... -.. - .--. -- -
The Honorable Lynn Ade1~n Poge 2 Section 5 of the Federal Trade Commission Act prohibits unfair methoda of competition, an~ unfair or deceptive aots or practices. By enforcing this statutQ, the eo.aiaaion ataff has gained substantial experience in analyzing tbe impact of various ~estralntB on competition and the costa and benefits to consumers or such restraint.. In recent year., the Commission statt has been involved 1n a number ot issues specifically dealing with retail automobile dealerships. In January 1986, lor txamplQ, the FTC's Bur~au of Economics published the results of a study of th) REflect of State Entry R~gulation on R4tail Automobile ~rkets. COmmission staff has also gained experience relating to the automobile industry through many investigations and litigated easelS. We believe that the current Wisconiin RMA la~ tends to restrict competition unn~ces8arily. It require. motor vehicle manufacturers an~ distributors who seek to establish or relocate automobile dealerships to give written notice to e~isting dealers Bellino vehicles of the same make within the relevant market are a • ~ (W is. S ta t • SS 218. 01 ( 1) (r): ( 2) (c) 2-. b ; 3 (a ) 32; 3 ( f) and 9 (a) (1985-86) ).' A -relevant market area - is de! ined as the area within a lO-mile radius of the aite of an existing daalership or the existing dealer's area of sales responsibility, whichever'1s greater. ThQ dealers entitled to notification may, within thirty days, file ~ protest with the offll e of the transportation commissioner alleging -good cause" for not permitting tha proposed dealership. Upon rece~pt of a protest, the office of the commissioner must schedule a hearing. If the matter is not settled, a hearin9 is held and a written opinion issued. 3 We are enclosing a copy o~ this Staff Report (Attachment 1) for your info=~tion. In oetermining if "good cause- t~iitl the state must con~ider -the existing circuroEt~nces, including, b~t not limited to:- (1) the £upply ana de~nd of vehicles of the same mak_: (2) the n&ture of the exi~ting dealers' inVEst- ment; (3) the effect on the retail motor vehicle ~rket in the area, (.() the public welfare; (5) the effect on competition; (6) the qU&lity of 54H\01ces being provi6e~ by exi~ting de&lers; (7) the quantit.ies of vehicles en6 ~:-t6 pr~.ise6 to e~isting ~eale:s compared to those &ctu~lly 6elivereo1 l.~d (8) t.he effect of a denial on ~n.~ppl:ct.:-;t. OHs. Stat. S 218.01 (3) (!) (2)} • .
The Honorable Lynn Adelm.an Page 3 Senate Bill '7 wilt B~nefit Consumers SB (7 would repeal all the portions of Wis. Stat. S 218.01 dealing with the tights of exlat1ng dealers to notification, prote8t and a hearing. We support this change. We believe that sa 47 is likely to increase competition in retail automobile markets in Wisconsin and thereby benefit consumere. Thi8 conclusion is based in large part on the FTC's Bureau of Economics Staff ReportS which concluded that ~ laws raieed automobile price., on Bverage, by six percent. Because RKA laws limit manufacturer.' freedom to ex~nd in areas where automobiles are most in demand, the RMA laws tend to increase the cost ot distributing automobiles and thus facilitate escalation of automobile prices. Consumers may find fewer opportunities to shop among dealerships for better prices and may have tp travel farther and expend more time in the couree of the! r. shopping. 5 6 Since the release of the Bureau of Economics (BE) Staff Report, Wharton Econometric Forecasting Associates (WEfA), at the r~uest of the National Auto Dealers ~sociation, has p~epare~ a report that reviews the Staff Report and challenges its conclusion that prices of automobiles would rise as a reEult of RMA laws in areas of growing popUlation. The WEFA report also ~iscus6es the theoretical arguments that RMA laws are desirable. Attachment 2 is a Bureau of Economics paper that responds to the *EFA report. WEFA's speculation that the Staff Report has demon9trat~d only that rap1~ly 9r~ing areaS have higher automobile prices rather than that the price increases are a result of R!"..h laws is shown to be unfoun6ed. The theoret~cal ArQUments that RKh laws are desirable are also shown to be unfounded. ~~ese price-increases that result from RY~ lA~! ~re most likely to occur in counties or metropolitan areas exper- iencing in=reases in popUlation (and the:~fore increases in demand). The results of this FTC study ~re cons~stent with other studies showinS that increased prices result from R~~ laws. See tcKard, E.W., Jr., -The Eff~cts of State Automo~ile Dealer Entry RegUlations on New cer Price&,· Econo~ic Incuiry, Vol. XXIV, No. 2 (~pril 1985), pp. 223-~2, and Smith, R.L. -Franchise Re;ulation: kn Economic ~~alYEi5 of State ~strictions on kutornobil~ Dist:ibution.- Jou:r~l o! ~w an: Econ~ics Vol. xxv (April 1982), pp. 125-57.
The Honorable Lynn Adelman P~ge 4 RMA l~ws may also provide op?Ortunities for existing dealers to deter or ~eley the entry of new competition by filing epuriou8 protests. The costs to existing dealers of such proteste are probably small relative to the potential gains. A prote~t cen Aelay the establishment of a new dealership by six months. Even if only a small percentage of protests succeed, they may impose eignificant costs on entrants and reduce the expected profits from entry. In ad~ition, by interposing delay, an existing dealer hae sn opportunity to negotiate some concession from the manufacturer in settlement of the protest. The costs/of such delays and concessions are ultimately PbBsed on to the consumer. We believe that exi~tin9 dealers are not likely to be injured by repealing these RMA laws, except where the laws m~y have insulated a dealer from competition and thereby permitted the ~ealer to realize excessive profits. There is little basis for present dealers' fears of being flooded with more dealers th~n potential sales in a market can BU?port. It would not be in the economic interest of either prospective-oealers or manu- facturers to invest in such a market. Prospective dealers are likely to give careful consideration to what the ~rket will bear in order to protect their investment in real estate, inventory and personnel. ~~nufecturers ~ill likewise avoid over-saturating a market, because they have an interest in the financial well- being of existing dealers. A manufacturer that treat! existing dealers badly is likely to have difficulty finding new dealers when the need ~ri6es. ~~ laws do not appear to be necessary for the adequate protection of dealer's rights. Their righte are protected by exi~ting laws and the right to sue in the same fashion ae franchisees in any other industry. Consequently, it is difficult to see Why automobile dealer! require sp~cial tr6atroent under the l~v. Without the restraint that the RMA laws place on menu- • facturers' ability to meet competition, manufacturers c~n be mc~e responsive to consumer demands. It is also unli~ely thet repealing RMA laws will reduce the quality of cealer service because vigorous competition among manufacturers ~ill ins~:e that consu~ers receive the ~ix of service quality, Quantity and price they ce!ire. .
The Honorable Lynn Adelman Pag_ 5 Other Provisions Th~t May H~rm Con8umers Two other provisions of S 218.01 ~y also raise consumer coste. One provision gives existing ~ealers the right to 60-cays notice of a manufacturer's intent to terminate a franchise and the right to an administrative hearing concerning the fairnes& of the t~rruination. (wis. Stat. S 218.01(2) (bd) an~ :218.01(3) (a)17 (1985-86». This notice and hearing provision, like the pro- visions addressed by SB 47, may ~ecreaee manufacturers' ability to adapt to changing conditions and thus hinder the establishment and maintenance of efficient distribution systems. Kanufacturers may also be th~arted from terminating inefficient dealers. The result 1s that consumers are denied the procoapetitive benefits of a responsive distribution system and are forced to pay the higher costs associated ~ith an inefficient system. Without this provision, dealers would remain protected from unfair termin- ations by the terms of their contracts and their private right to . sue, including the option to seek a preliminary injunction which could maintain the status quo until a final judicial determin- ation regarding the legality of the terreination. The other provision requires dealers to clo~e on Sundays, unless they close on Saturday! instead for religious reasons. (Wis. Stat. S 218.01(3) (a)21 (1985-86». Studies have shown that ~ndato=y Sunday closing laws may harm consumers directly by increasing the costs and inconve9ience of shopping, and indirectly by increasing prices. For many people, the option to shop on Sunday enhances the ease and convenience of b~ying a car. Eliminating one of the weekend's two days from car shopping forces potential buyers to make personal and economic .acri:ices they would not othe:~ise have to make. If they cannot ~hop on Sunday, some pote~~ial buyers may find it neceesa:y to take t:rue from work, give up some activities reserved for Sat~=day, or lose leisure time on week~ights. Measuring the cost to consumers of inconvenie~~e or los~ leisure is di~ficult, but the cost is real. The costs of taking off work, or taking several wee~ nights to accomplish what can be done during one full day is more easily measured in terms c~ lost wages, vacation tlme and transport~tion and other costs. i See, e.g., Carlson 0 Gieseke, ~Price Search In a'P:06uct Koartet,· Journal 0: Consumer Resee.rch, March 19S3, pp. 357- 65, Morri~on « ~e.~n, in 'Eou:e 0: Operation P~strictionE and Competition ~~ng Ret~il Pirms,· Econ~ic :noui:v, Vol. XXI, Jenuary 19£3; Stigler, ·7~~ EconorolC! ot :~:o=wetion,· Journal of ?o~1tica~ Econo~v, Jun. ~961, pp. ~13-2S.
t. The Honorable Lynn Adelman Page 6 Increa8~d shopping costs may lead to increased automobile prices. ~s the co~t of shopping rise&, consuaers may ~hop less for automobiles. To the extent that consumers who shop less are Jess informed about the market, they may be willing to pay higher prices than vould be likely in a well-informed market. Conclusion In summary, we en~orse SB 47, which would remove certain of the restraints imposed by the present law on the retail auto- mobile ~rket. By removing these restraints, we believe Wisconsin will be continuing its tradition of progre~aive consumer legislation. We also encourage you to consider legis- lation eliminating the other provisions discussed in this letter. We appreciate this opportunity to provide our views on 5B 47 and related provisions. Very truly your~, },I~ r.~ William P. Golden Actina Director Chicago Regional Office TTH: jd
6/03/87 RespODU to Wharton EcoDometric FOrtcastlD& Auoclatu' CommtDts O. tbe Barca. or EcoDomlcs Study or Releuat Mark.~t Area Laws Thu paper l responds to comments by VI'barton Econometric Forecasting Associates C-WEFA-)2 concerning a 1986 Bureau of Economics Staff Report entitled lbe Effects of State Entry Regulation on Retail Automobile Markets- (-Staff Report-). The Staff Report concluded on the basis of an econometric study tbat state relevant market area laws rRMA laws-) increase the retail prices of automobiles..' The WEFA comments suggest that tbe Staff Report's conclusions are not valid because of errors in specification of the price model. Below, we respond to Vt'EFA's comments and, affirm our earlier conclusion that RMA laws increase retail automobile prices in areas of positive population growt'h. In addition to criticizing the Staff Report, WEFA argues that in theory RMA laws may be desirable and that these laws will not be likely to impose costs on society. Below, we respond to ViEFA's comments and conclude that RMA laws are neither necessary nor desirable for the proper functioning of the automobile dealer market. Instead, bocause of the price effects discussed above, we conclude that these laws can be very costly. 1 This report has been prepared by Dr. Alan Mathios.. It repres:nts the views of the Bureaus of Competition, Consumer Protection. and Economics., and does not necessarily represent the views of the Commission or any individual Commissioner. The Commission has.. however. voted to a uthorize its submission. 2 WEFA. -An Evaluation of the FTCs Analysis of the Effects of RMA Laws on Auto Markets- (January 1987). The WEFA report was prepared at the reQue~t of the National Automobile Dealers Association (NADA). , State relevant market area laws in general give existing franchist.:d automobile dealers a right to challenge the establishment or relocation by their franchisor of other dealerships within a certain distance of their dealership.
- Section I of the report evaluates the theoreticil argu~nu that RMA laws are desirable. Section II briefly discu1Ses the econometric model used in tbe Staff Report. We then turn to \\'EFA's comments concerning the Staff Report model WEFA's comments can be divided into three types: 1) criticisms that apply to any econometric analysis, 2) comment! that can be • empirically investig.ated to see if they cause ch~'nges in the conclusion of the Staff Report, and 3) comments that cannot be addressed without additional data, some of which can be obtained only from the auto dealers themselves. We respond to these comments in Sections III, IV, and V respectively. We present our conclusions in Section VI. I. The Alleged Need for RMA Laws WEFA discu~ the arguments put forth by proponents of RMA laws. For example, VlEFA reports (at pp. 8-12) that RMA laws are necessary because without such laws: 1) manufacturers will have an incentive periodically to grant franchises in an area even when the market cannot support an additional dealership, 2) the value of goodwil! developed by dealers is diminished by the establishment of new dealers., 3) consumers' .interests are not protected because divergence between the interests of I manufacturers and consumers causes a deterioration of dealership service Quality, and 4) the existing legal system does not provide adequate protection of dealcn' rights. In addition, Vt'EFA claims that the .costs of RMA laws are small in terms of dealerships that are denied. Below we discuss each of these issues.· • Vr'EFA provides no empirical evidence for any of the arguments concerning the necessity for RMA la ws.
\\'EFA contellds (at p. II) that 'w]hile the manufacturer cannot maintain a healthy Ind producti .... e dealer organization if tbe dealerships, on balance, are unprofitable, the manufacturer may benefit by granting new francbises in a given market area even when the market cannot support an additional dealersbip.- This argument ignores tbe incentives both .manufacturers and dealers ha .... e to maintain a strong dealer network. It is Dot in the interest of either prospecti .... e dealers or manufacturers to invest in a market in which an additional dealer cannot prcfita bly exist. While a -f1y-by-night- manufacturing company would engage in actions that decrease the value of a franchise after a dealer-manufacturer agreement has been reached, this is not the case for auto manufacturers. whos.e treatment of dealers will be widely known and who must rely on dealers in the future. If a manufacturer is too willing to experiment with additional dealerships, the resulting dealership failures would make it more costly for- the manufacturer to attract new dealers in the future. Therefore, it is in the manufacturer's best interest to establish a strong dealer network. Even if a manufacturer attempted to mislC3d potential dealers regarding the profit potential of a new dealership, the prospective dealers have strong incentives to obtain unbiased estimates of the potential sales of the mark.eL Therefore, whether "'RMA laws exist or not., there is little reason to belie .... e that manufacturers will have either the ability or incentive to open too many dealerships in any markeL WEFA is correct in its assertion that it is important for a dealer to establish a favorable reputation (goodwill) with the public. However, it IS not evident that the establishment of another dealership diminishes the \'all,;~ of the goodwill. For example, upon receiving high quality service from a 3
Chevrolet dealer in an uea wher~ there are two Chevrolet dealen, purchasers are likely to recommend the particular dealer (rom whom tbey purchased the car. In any event, WEFA correctly asserts (at p. 12) that ·an individual dealer who establishes a good reputation will also establish value for the manufacturer because of the linking of the dealership with a make of vehicle (~.g.. Smith Chevrolet or Jones Dodge).· Because this is the case, it is 'in the manufacturer's economic interest to keep this franchise healthy. Actions by the manufacturer that would diminish the return to the individual dealer would also hurt the manufacturer. Therefore, RMA la ws do not seem necessary to prolect the value of a dealer's goodwill. WEFA also claims (at p. 7) that RMA laws are needed ·beca use manufacturer and consumer interests are not coincident and the unrestricted ability of manufacturers to open new dealerships may result in a deteriora tion in the quality and quantity of dealer servicc:...· This argument is inconsistent with the workings of a competitive automobile markeL Competition from dealers of other manufacturers will insure that consumers receive the mix of service, quality, quantity and price they o;I'ant. In fact, it is possible that tbe reduced level of competition in RMA states may cause dealers to be less responsive to the desires of consumen, and provide a 'lower quality of service. In addition, manufacturers and consumers have congruent interesu in the maintenance of dealer quality ~ince consumers are unlikely to recommend the dealer to other consumers, or purchase the manufacturer's product from the dealer in the future, unless they receive adequate service from the dealer.' £ Most car sales by dealers are probably concentrated in the immediate local ar~. Therefore, ·word of mouth· communication concerning the quality of the service may be an important determinant of sales. 4
WEFA argues that dealers' rights are not adequately protected in spite of existing dealer-licensing laws and the dealer's ritht to sue the manufacturer. For ex.ample, it is argued that use of the court system is so costly to dealers that is docs not adequately protect their rights. But there would seem to be nothing distinctive about automobile dealerships that makes the protection of their rights under existing laws less adequate than those of any other franchisee. Consequently, it is difficult to see why automobile dealers in particular require special treatment under the law. In addition, the establishment of an alternative to the court system that imposes low costs on existing dealers can create incentives for those dealers to raise spurious protests. This is particularly true if unsuccessful protests can delay the opening of new dealership by several months. 6 Vr'EFA claims that existing data do not support the claim that RMA laws will lead to higher prices by stopping the opening- of new dealerships. The data '\\'EFA cites are from a National Automobile Dealers Association survey which shows that only 6 percent of incumbent dealer protests resulted in new dealerships being denied. However, the 6 percent figure represents only the -tip of the iceberg- in terms of the impact of RMA laws on the number of dealerships. First, RMA laws provide existing dealers with >the opportunity to delay the opening of new ~ealerships by filing spurious , protests. Such deuys will reduce the number of dealershi~ at any point in time. Second, the 6% figure does not reflect dealenhips that the manufacturer decided not to establish because of the expected costs and 6 Vr'EFA cites a survey by the NADA which shows that only 6% of protests are decided in favor of the protesting dealer. This is consisten t with the notion tbat many of the protests are unfounded and are made simply to delay tbe opening of new dealerships. See discussion infra. 5
delays a~iated with defending themselves against the protests of existing dealers. f To correctly ascertain the effect of tbe RMA laws on the number of new dealerships. one needs to know the number of dealers that would have been established in the absence of RMA laws. The percentage of protests decided in favor of the manufacturer gives the minimum number of -dealerships not established because of RMA laws. The actual deterrence effect on entry may exceed this minimum by a substantial amount. In summa·ry, the theoretical arguments that RMA laws are desirable are unfounded. RMA laws do not seem necessary for the proper functioning of the automobile dealer market Manufacturers do not have incentives to over-saturate a market with dealerships or to provide inferior Quality. Moreover. RMA laws appear unnecessary for the. protection of dealers' rights. Their rights are protected by existing laws and the right to sue in the same fashion as those franchisees in any other indusir·y. Finally. rather than providing evidence on the total number of dealerships that have not been established because of RMA laws, WEFA has provided evidence concerning the minimum number of dealerships that have not been established. Although the theoretical arguments on which WEF A relies are fIa wed, 'the actual effect of RMA la ws is still an empirical issue. It is to this more important issue that we now turn our attention. 7 In other words, the effect of the RMA laws cannot be judged by the percentage of prot~ts that are decided in favor of the manufacturer. Those manufacturers that Itteopt to establish new dealers in spite of the Rt.iA law are those manufacturers who are relatively confic::nt they will \I.'in the protesL Those manufacturers who feel that the RMA laws put them at too much of a disadvantage may not even try to establish a dealership even i; that would be in their (and the consumer's) best interest. Therefore, it is not surprising that only 6 percent of the protests are decided in :avor of the protesting dealer. 6
II. The Starr Report Model To examine the effects of RMA laws on the retail price of automobiles, the Staff Report developed a model of supply and demand for new a utomobiles, using 1913 cross section da ta.' Unlike modeu developed by • other~ the Staff Report model takes account of the possibility that variations across areas of the country in the laws regulating auto dealers may be in part due to different conditions in local auto retail markets. Previous authors have assumed that the laws are established independently of any influence by auto dealer~ In addition, the Staff Report model allows for different effects of RMA laws depending on whether or not the region is experiencing an increase in population. This latter consideration is extremely important. Laws that restrict entry of' dealers into areas where there is uro or negative population growth are likely to have no effect, because in tbose areas it is unlikely that manufacturers would find it in their interest to start a new .' dealership anyway. Therefore, an econometric analysis that does not distinguish between areas with negative and positive growth is likely to mask some of the effect of RMA laws. [he effect of RMA laws on the price of automobiles is estimated from the price (supply) equation, within, a multivariate frame'work that accounts for the effects of various factors on price. While taung account of , This model is similar to the models of Smith and Eckard. See Eckard, E.W.. Jr. ~e Effects of State Automobile :>ealer En:ry Regulation on New Car Prices-, Economic Inquiry, Vol XXIV, No.2, (April 1ge5), ~v· 223·42, and Smith, R.L.. -Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution-, Journal of Law and Economics, Vol XXV, (April 19&2), pp. 125·57. 7
population growth., the prices of automobiles in areas with RMA laws, are
compared to thos.e in areas wbere tbere is no la w. The Staff Report
concludes that in areas experiencing population growth, RMA laws ba ve a
large and statistically significant positive effect on the price of automobiles..
This is the conclusion that WEFA claims is invalid, becau.s.e according to
WEFA, tbe concl~ion results from a misspecification of the supply model.
III. WEF A Comllluts OD the Econometric Analysis
We address first WEFA's assertion that tbe Staff Report's econometric
analysis has specification errors. This is a relatively easy claim to make
with respect to any econometric analysis. It is more difficult to evaluate
the effect of any asserted specification error on the results of the analysis..
After carefully considering the misspecifications asserted by WEF A we are
unable to find any indication that tbe Staff Report omitted any variables
tbat would be expected to be correlated with RMA laws..9 Absent a
relationship with RMA laws, the omission of such variables clearly does not
affect the validity of the analysis.. I
In addition, WEFA asserts that
relationsbips among included variables can lead to misleading or biased
results. We expl1in below why this is untrue. Finally, V{EFA mistakenly
~ equates the total explanatory power of an econometric model with the
significance of an individual variable.
\VEFA assem (at p. 4) that ·Viewed from the perspective of its ability
to explain regional variations in the dealer margin, the FTC model is a
failure. The model introduces 108 [acton of which 75% have an incorrect
9 By correbtion we mean the regression coefficient of the RMA 13 w
In the regression of the excluded variable on all includec "·ariables.
8
(using FTC criterion) directional or I statistically insignificant effect on the margin·. We believe this statement is misleading because it fails to consider that if the factors in the model were not explaining varia tion in dealer margins, us.ing common statistical tests. 95% of the factors would be insignificant. In fact, a very simple statistic exists to determine whether -the entire set of factors in a model, taken together, are statistically meaningful. lO Each of tbe 9 equations in the Staff Report passes this test at more than the conventional level of significance.ll VlEFA also clainu (at p. ]4) tbat the Staff Report demand model -leads to clearly incorrect estimated relationships· because -it introduces all the separate relevant explanatory factors individually, [where] the various explana tory factors are interrelated-. This is not true. 12 In terrela ted explanatory variables do not cause incorrect estimation (bias). In fact, if the estimation yields significant coefficients they are perfectly valid and 10 This statIStJC is called an F-statistic. The F-statistic is based on how much variatioD in the variable of interest is explained by the factors in the mc.del. For the two-stage least squares model (the model used in the Staff Report) the relevant statistic is actually a chi-square statistic. 11 We preseDt these statistics in Appendix C, where tbe results of the dealer margin equation are presented. 12 In fact, if a model has interrelated explanatory variables, the omission of any of these variables from the analysis will bias the results. To avoid misspecifiC3tion, it is essential that all variables that affect the dependent variable Ind are interrelated with other explanatory variables be included. See Pindyck.., R.. and RUbinfeld, D., Econometric Models & Econorr.:'c Forecasts, McGraw-HilL. 198] (pp. ]28-130). 9
correct. 13 An interrelationship among variables is an explanation only for why individual coefficients may appear to be insignificanL According to WEFA if a relevant variable H is excluded from the analysis, tbe results concerning the included factors arc Dot valid. This is not always true. The exclusion of relevant variables bia!>Cs the estimates of the included factors only if the included factors are correlated with the excluded relevant factor. u WEFA's criticism of tbe Staff Report is unfounded because they provide no evidence of correlation between the excluded and included factors. For example, WEFA suggests that s'pecific regional costs of owning and operating an automobile dealership should be included in the analysis. The issue is not whether these resional costs affect price (they probably do), but rather whetber they differ for dealers that operate under RMA laws and those that do not. If regional costs do not differ in tbis, way, then the estimates obtained without including the regional cost variables are unbiased. WEFA suggests that if a model does not explain most of the varia tion in the variable being studied, i.e.. have a high R', then the model has not performed well lS For example, WEFA states (at p. 21) -the objective of the IS See Kmenta. J.. Elements of Econometrics. Macmillan Pubiishing ,Co .. New York. New York. 19'71. Kmenta states (p. 388) -Let us now examine the connection between tbe degree of multicollinear::y and the properties of the least squares estimators of the regression coefficients. Under the basic assumptions of the classical nQrmal linear regression model, the least squares estimators of the regression coefficients have, all the desirable properties.- H By relevant. we mean that the variable is important in explaining the dealer price or margin. See Pindyck. R .. and RUbinfeld, D .. pp. 128·130. 16 R2 indiC3tes tbe percentage of variation in the dependent variable explained by the model. 10
FTC supply model was to explain regional variations in the dealer margin and to determine whether introducing RMA la W$ increased this margin. If essentially all the explanatory power in the average unit retail price equation comes from the unit dealer cost variable. the FTC model is not doing a good job at explaining variation in the dealer margin-. If the Question is whether • RMA laws increase the retail price of automobiles, a statistically significant positive relationship between retail price and RMA laws is entirely sufficient to conclude that [bey do. l1 The percentage of the variation in retail price explained by the Staff Report model is not a relevant consideration.ll The \VEFA analysis next turns to more substantial matters of misspecification. The major misspecification cited by WEFA can be analyzed by simple respecifications of the model. This is tiiscussed below. IV. Empirical IDYutigatioD of WEFA Comments The WEFA report claims that. rather than finding that RMA laws result in higher prices in areas that are experiencing large percentage increases in population. the Staff Report has really found that either. 1) market areas with large absolute population increases have higher retail motor vehicle prices. or 2) market areas with old RMA laws and large absolute population "increases have higher retail motor vehicle prices. In particular Vr'EF A notes 11 This conclusion assumes tha t there are no omitted facto,s that are correlated with the laws. There are many examples of empirical models where there is a low R 2 and very reliable effects on a specific factor. For example. in examining earnings across individuals, those who have more experience earn more than those with less experience. The typical R 2 in such models is approximately .2 yet the factor 'experience- is statistically significant. 18 The measure of goodness-of·fit used in the Staff Report modd is actually the square of the correlation coefficient between the actual and predicted value of the dependent variable. 1 I
(at p. 4) that ·since only large rapidly growin& cities have large absolute population increases. the FTC may merely have documented that wage and other dealer costs are higher in major metropolitan areas than in smaller urban areas aDd rural areas.· The Staff Report included the percentage change in population (whether positive or negative) as a factor to explain retail prices. WEFA asserts that the absolute change in population for areas with growing population should have been used a..s a factor. since a large growing city can have a small percentage increue in population but a large absolute increase. To account for this we have re-estimated the identical price (supply) equation, except that this time we have included a variable that captures whether an area has pOSItive absolute population growth and. if so, how large an absolute growth. Our results confirm the conclusion drawn from the original equation, namely that RMA laws in areas with growing populations (Whether absolute or percentage) have a positive effect on motor vehicle prices. 1Q We have also re-estimated the identical specification, except that this time we use the percentage increase in population only if positive. and zero otherwise. This will allow us to compare prices in areas with population growth and RMA laws to prices in areas with population growth but without IRMA laws. The results using this variable confirm the conclusion that in growing areas. RMA laws have a positive and significant effect on the price of a utomobiles.~ lQ The ne .... and original regression results are presented in Appendix A, along with a brief summary of the findings regarding the law variables. :0 The regression results for the originaJ and new specifications (l:.-e given in Appendix B along with a brief summary of findings regarding the la w varia bles. 12
The WEFA study suggests that it is more appropriate to explain dealer
margins than to explain retail prices. WEFA claims that by including dealer
cost as an explanalory variable, the R S of the -equation is bither and offers
a misleading indicator of performance of the model. While we do not agree
with WEFA's c1aim 21 , in the interest of completeness we bave re-estimated
• the equation with dealer margin as tbe dependent variable to be explained.
The results confirm our conclusion that in growing areas RMI\ laws have a
positive effect on automobile prices.:!
V. WI:fA Commut' that Require Additional Data
We agree with WEFA that it is preferable to include dealer cost
variables that are associated with the specific market area (S~1SA or county
level) than to use statewide averages. For example, WE FA suggests that
wages should be collected for each market area, but, as vtEFA notes, such
data may not exist. In lieu of specific wage data, V{EFA suggests using
wholesale-retail trade and service-sector wage rates, which can be calculated
for all the market areas. It is not clear whether these variables would be
superior to statewide averages of wages specific to the auto dealer sector.
This would depend on how similar auto-dealer wages are to tbe entire retail·
(
21 We have already dismissed the role of R% in evaluating the impact
of RMA laws on the price of motor vehicles. In addition, the econometric
model v,'as originally specified as a demand and supply equation for
automobiles.. Consumers do not care about margins, they care about price.
It is appropriate to estimate the mode! with price as the dependent variable
and include determinants of price 8~ explanatory variable!.. In fact, by
including the cost of the automobile to the dealer as an explanatory
variable, the Staff Report is being less restrictive since is not restricting
the coefficient on this factor to be equal to I, as is the case if dealer
margin is used as the dependent variable.
%1 The results of these regressions arc given in Appendix C along with
a brief summary of the findings regarding the law variables.
13
-._--- wholesale trade wages versus how similar local auto dealer WI ges are to statewide auto dealer wages. WEFA also suggests that it would be useful to obtain data for dealerships over time and compare the prices of automobiles before the RMA laws were passed to the prices afterward1. They claim that because many of the potential omitted variables would not change over tim<; by comparing pre- and post-law prices we would avoid many problems.. While we agree that this would be a useful additional exercise, the lack of such a comparison does not imply that the cross-sectional analysis in the Staff Report is invalid.. In fact. in the time-series, cross-sectional analysis suggested by \\'EFA. the number of cross section observations (different deaiers) will far exceed the number of time periods (the number of years of data for each dealer). Consequently. the bulk of the econometric analysis would still compare prices across dealers, rather than prices' across time. In summary. WEFA suggests that to ·fix· the Staff Report model. regional differences in dealer ownership and operating cost must be properly and _completely incorporated into the model. Additionally. \\'EFA suggests that regional differences in dealership size, sales mix within makes. dealer supplied options., and regional differences in legislation must be included. As 'discussed above. because \\'EFA provides no evidence that these variables are systematically related to the existence of RMA laws. it cannot be concluded that their omission from the Staff Report model will affect the validity of the conclusions about the effects of RNtA law~. 14
VI. CODcluloa Although WEFA has claimed that the Staff Report may be subject to specification error, WEFA provided no examples of misspecification that are likely to affect tbe report's conclusion. WEFA cited a few variables tbat are not included in the analysis but Vr"EFA provid=s no evidence that these variables differ systematically between regions that are subject to RMA laws and regions that are not. a necessary condition for obtaining biased results. WEFA's speculation that the Staff Report has demonstrated only tl.3t rapidly growing areas have higher automobile prices has been shown to be unfounded. When controlling for the absolute growth of an area. we still find that RMA laws in areas with growing populations have a positive effect on" motor vehicle prices. Other specifications of the growth variable also confirm the effects of Rt.iA laws. Finally, examina tion of dealer margins instead of prices does not change the report's concl usion. - - 15
Appndlx A In this appendix we report the original and DCW estimates of the supply equation. The following change was made in the equation. The growth rate varia ble (GR) was originally defined as the logarithm of the ratio of the observation year population to that in 1970 (pcrcentage chaDge in population since 1970). The new growth variable is defined as the absolute change in population between 1970 and 1978. if positive. aDd zero otherwise." All of the other variables are defined as they were in the original report. Obviously. this change will affect the coefficicnt on the growth variable. Table reports the old and new coefficient estimates for the supply eQua tion. A Comparison of the old and new results reveals that. while the coefficients involving the RMA law variables (ROl.p. lAGRO. IAGR 1. and IAGRlSQ) have changed slightly. the new estimate of the coefficient on the interaction of the; law variable and absolute population- growth. IAGRI. is larger and more significant for every car model. In Table 1. coefficients with t-values (which appear in parentheses under the coefficient) greater than or equal (in absolute value) to 1.96 are ,significant at the 95% level. Table 2 presents the old and new estimates of the impact of RMA la W$ on the price of each model type.:3 It is clear from Table 2 that for both , the old and new equations. RMA laws in areas of growing populations have a positive impact on price. In addition, for 7 of the 9 model types. the new equation yields larger positive price effects than did the old. :: To be consistent with the original specification we have transformed the absolute growth variable. The transformation is idcntical to the transformation of the AGR variable in the Staff Report (p. 62). :~ This estimated effect involves a combin:ltion of some of the coefficient estimates of the supply equation. 16
Appendix A - Table I The Estimated Regression Coefficients for the Retail Stlpply Equation for the Nine Chevy Auto Body-Types for 1971 (Dependent Variable • Log of Retail Pri~) Variable Body lYRe Regular Malibu Cama fO Qli1 ~ Qlit &:::. QM ~ C .7875 .68JO .5426 .45 J2 .2~:6 .1447 RNEW -.0028 -.0027 -.0032 -.OO:!8 .0032 .0037 (-.94) (-0.83 ) (-1.l6) (-0.90) (J.10) ( 1.07) ROLD -. J0 J3 -.1253 -.0941 -.1317 .0395 -.0218 (-1.68) (-2.JO) (-1.70) (-2.32) (.66) (-0.34) lAGRO .0103 .0124 .0095 .0130 -.0067 -.0004 (1.49) (1. 79) ( 1.50) ( 1.97) (-.97) (-0.57) IAGRI 2.0869 3.1406 1.6992 . 2.7910 2.8680 4.0269 (4.72) (5.70) (4.17) (5.46) (6.65) (7.08) IAGR J SQ -5.348 -9.5244 -4.530 -7.5770 .. -9.169 -13.40J (-1.9J) (-5.J4) (-1.75) (-4.36) (-3.~2) (-7.10) PW .9077 .9 J62 .9306 .938 J .9926 .9949 (69.83) (67.25) (77.80) (70.06) (99.74) (E8.82) WAGE .0 J2 I .OJ 58 .0208 .0235 -.0 I J8 -.00~8 ( 1.32) ( 1.76) (2.4 3) (2.73) (-1.28) (-0.5 I ) ADV -.0043 -.0055 -.0038 -.0054 -.00J4 -.0035 (-3.6J) (-5.00) (-3.43) (-5.04) (-1.J4) (-3.01) ,DENS -.0039 -.00:!8 -.00:2 -.0015 .0014 .00:2 (-5.46) (-4. J8) (-3.38) (-2.26) (1.95) (3.05) GR -.0031 -.1755 .0053 -.1993 .0150 -.174 J (-.40) (-2.02) (.73 ) (-2.41) (1.96) (-1.97) , FORCE -.0135 -.0162 -.0121 -.0170 -.OOi 1 -.0106 (-2.53) (-2.70) (-2.39) (-:.90) (-1.41) (-I.ii) CANCEL .01 i4 .0226 .01 i2 .0241 .0074 .0137 (3.34 ) (3.8 J) (3.52 ) (4.19) (1.48) (2.29) LD -.0131 -.0107 -.0160 -.0146 -.0116 -.0090 (·2.47) (-1.90) (-3.14) (-2.65) (-:.::) (-1.54) 17
Appendix A - Table 1 (Continued) The Estimated Regression Coefficients for the Retail Supply Equation for the Nine Chevy Auto Body-Types for 1978 (Dependent Variable • Log of Retail Price) Varjat-Ie Body Type ~ova Monte Carlo Monza Ql.d. ~ Ql.d. ~ Ql.d. fu:=:. C .7723 .6915 04099 .3389 .6682 .5300 RNEW -.0006 -.0006 -.00:3 -.0022 -.0045 -.0041 (-.20) (-.21 ) (-.82) (-.7:!) ( 1.28) (-1.12) ROLD .0155 -.0260 -.0990 -.1184 -.0231 -.0951 (0.30) (-0.51 ) (-1.79) (-2.21 ) (-.32 ) (-1.42) lAGRO -.0024 .0021 .0100 .0120 .0008 .0086 (-040) (0.35) ( 1.58) (1.91 ) (.09) (1.10) IAGRI 1.5946 2.1550 1.7007 2.3502 1.3734 2.6807 (4.06) (4.60) (4.02) (4.59) (2.70) (4.64) IAGR ISQ :'5.024 - 7.4424 -4.621 -7.7015 - - -.9754 -8.0685 ( -2.03) (-4.67) (-1.73) (-4.52) (-.31) (-4.14) PW .9067 .9112 .9495 .9540 .9235 .9275 (90.34) (87.77) (81.92) (79.95) (104.7) (104.34 ) WAGE .0151 .0207 .0172 .0213 .0103 .0243 (1.72) (2.57) ( 1.96) (2.57) (.95) (2.50) 'ADV -.0021 -.0035 -.0027 -.0037 -.0015 -.0044 ( -1.96) (-3.47) (-2.44) (-3.63) (-1.04) (-3.58) DENS -.0007 -.0003 -.0021 -.0014 ~ -.0016 -.0003 (-1.10) (-<l.56) (-3.05) (-2.25) (-1.84) (-0.4 1) GR .0108 -.0768 .0017 -.0908 .0201 -.1485 (1.54 ) (-1.02) (.23) (-1.13) (2.:2) (-1.64) FORCE .0031 .0013 -.0162 -.0172 -.0062 -.0075 (0.63) (0.24 ) (-3.22) (-3.14) (-1.00) (-1.17) CANCEL .0036 .0071 .0179 .0206 .0128 .0183 (.76) ( 1.35) (3.68) (3.83) (2.09) (2.88) LD -.0087 -.0076 -.0121 -.0103 -.0168 -.0118 (-1.82) (-1.54) (-2.37) (-1.96) (-2.77) (-2.0:) I!;
Appendix A - Table 1 (Continued) The Estimated Regression Coefficients for the Retail Supply Equation for the Nine Chevy Auto Body-Types for 197& (Dependent Variable-Log of Retail Price) Variable Body Tvoe Cheven, SPQrt v2D CQrvette Qli1 ~ Qld. ~ Ql.d. New C .5561 .4336 .2245 .1123 AI31 .2340 RNEW -.0025 -.0027 -.0077 -.0080 .0033 .0053 (-.81 ) (-0.77) (-1.61) (-1.58 ) (.36) (0.57) ROLD -.0672 -.1037 -.0280 -.0831 .3033 .3303 (-1.03) (-1.61 ) (-.24) (-0.79) ( 1.69) ( 1.97) lAGRO .0053 .0089 .0012 .0077 -.0402 -.0447 (.70) (1.18) (.09) (0.62) (-1.95) (-2.30) IAGRI 1.9861 3.2553 1.7323 . 2.1 ~92 3.1587 6.4510 (4.33) (5.65) (3.45) (3.59) (:.36) (4.24 ) IAGR1SQ' -4.4453 -9.9334 -3.69i2 -7.4675 - - -1.7200 -15.84 (-1.54) ( -5.21) (-1.31 ) (-3.69) (-.21 ) (-3.08) PW .9289 .9368 .9649 .9688 .9743 .9806 (95.60) (8&.95) (89.67) (89.24) (39.72) (39.62) WAGE .0198 .0268 .0222 .0336 .0044 .0186 ( 1.99) (2.81 ) ( 1.39) (2.33) (0.15) (0.73) . ADV -.0038 -.0057 -.0056 -.0070 .OOC2 -.0035 (-2.99) (-4.81 ) (-2.76) (-3.96) (0.06) (-1.07) PENS -.0005 .0008 -.0018 -.0006 -.0087 -.00~6 (-.66) (1.09) (-1.72) (-0.61 ) (-3.82) (-2.33) GR -.0022 -.1941 -.0060 -.0602 -.0169 -.5242 (-.27) (-2.13) ( -.46) (-0.68) (-.70) (-2.: 1) FORCE -.0096 -.0121 -.0120 -.0097 -.0031 -.0041 (-1.71) (-1.93) (-1.60) (-1.28) (-.19) (-0.25) CANCEL .0186 .0246 .02:2 .0234 .01 :4 .0217 (3.3&) (3.92) (3.25) (3.34) (.79) ( 1.3:) LO -.0212 -.0174 -.0050 -.0030 .0::: .0344 (-3.93) (-3.10) ( -.67) ( -0.40) (1.37) (:.1 ~) 19
Appendix A • Ta ble 2 The Impact of the RMA La W$ on the Price of Chevrolet Cars in 1978 Body Type Average Percentage Price Change For Areas with Positive POQulation Growth Regular 5.90·· 7.68 -- Malibu l 5.02·· 8.35·· Camaro 8.43·· 11.80·· Nova 4.18· 5.09- Mon te Carlo 5.30·· 6.03·· Mooza 8.81·· 7.08-· Chevette 5.87·· 7.58 . Sportvao 3.68 3.28 Corvette 16.82·- 18.75 1 The esti~a te of tbe price effect for the Malibu 10 the Staff Report should . ha ve been reported as 5.02 rather than 14.31. • sigoifi:antly above zero at the 95% level. •• significantly above zero at the 99% level. :0
." Appndlx B In this appendix we report the original and new estimates of another specification of the supply equation. The following change .-as made in the specifica tion. The growth rate variable, GR, was changed from the percentage growth rate to the growth rate if positive. otherwise zero. All of the other variables are defined as they were in the origirul report. Table J reports the old and new coefficient estimates for the supply eQua tion. It is clear from the results below that the eQua tion is not s.ensitive to this change in the growth rate varia ble. Like the original equation, the interaction of the law ""ariable and areas with population growth. lAGRI. is positive and significant in all 9 equations. In. the following tables. coefficients with t-values of greater than or equal (in absolute value) to 1.96 are significant at, the 95% level. The t-values are reported under the coefficients and appear in parentheses. Table 2 pre~nts the old and new estimates of the impact of R?>1.A la ws on the price of each model type." It is clear from Table 2 that for both the old and new equations, RMA laws in areas of growing popul:<tions have a positive impact Ot price. " This estimated effect involves a combination of so~: of the coefficient estimates of the supply equation. 21
Appendix B - Table J The Estimated Regression Coefficients for the Retail Supply Equation (or the Nine Chevy Auto Body-Types for 197& (Dependent Variable • log o( Retail Price) Variable Bodv Type R,gular Malibu Ca rna rQ QM ~ QM. ~ Qli1 ~ C .7875 .7803 .5426 .5327 ..2.226 .2119 RNEW -.0028 -.0029 -.0032 -.0032 .0032 .0032 (-.94) ( -.98) (-1.16) (-1.21 ) (J.l 0) (1.08) ROLD -.1013 -.1091 -.0941 -.1060 .0395 .0196 (-1.68) (-1.84) (-1.70) (-1.93) (.66) (.33) lAGRO .0103 .0 112 .0095 .0109 -.0067 -.0044 (1.49) (1.65) ( 1.50) ( 1.73) (-.97) (-.64) IAGRI 2.0869 2.073 1.6992 1.6939 2.8680 2.888 (4.72) ( 4.69) (4.17) (4.14) (6.65) (6.69) IAGR 1SQ-5.348 -5.39 -4.530 -4.619 ---9.169 -9.315 (-1.91 ) (-1.93) (-1.75) (-1,78) (-3.42) (-3.47) PW .9077 .908 .9306 .9314 .9926 .9924 (69.E3) (69.78) (77.80) (77.43) (99.74) (99.54) WAGE .0121 .012 .0208 .0213 -.0118 -.0102 (1.32) (1.33) (2,43 ) (2.49) (-1.28 ) (-1.11) ADV -.oo·n -.0043 -.0038 -.0389 -.0014 -.0017 (-3.61) (-3.66) (-3,43) (-3.54) (-1.14) (-1.42) DENS -.0039 .0039 -.0022 -.0022 .0014 .0013 , (-5.46) (-5.41) (-3.38) (-3.34) (1.95) ( 1.86) GR -.0031 -.0024 .0053 .0050 .0150 .0095 (-AO) ( -.30) (.73) (.66) (1.96 ) ( 1.19) FORCE -.0135 -.0138 -.0121 -.0125 -.0071 -.0075 (-2.53) (-2.58) (-2.39) (-2,45) (-1.41 ) (-1,49) CANCEL .0 j '74 .0177 .01'72 .0177 .0074 .0080 (3.34) (3.39) (3.52) (3.59) (I.4S) (1.60) LD -.0131 -.0132 -.0160 -.0161 -.0116 -.0116 (-2.47) (-2.48) (-3.14) (-3.1S} (-2.::) (-:.::n ............
--_.. _--- _..
Appendix B • Table 2 The Impact of tbe RMA Laws on the Price of Chevrolet Cars in 1978 Body TyPe Average Percentage Priu Change for Areas wjeh Positive Population Growth Regular 5.90" 5.79·' Malibu l 5.02'· «.69" Camaro 8.43·' 8.44" Nova 4.18 • ...06' Monte Carlo 5.30·' 5.28·' Monza 8.81 •• 8...64 •• Chevette 5.87" 5.81·' Sportvan 3.68 3.89 Corvette 16.82" 17.28 • 1 The estimate of tbe price effect for the Malibu in the Suff Report should· ha ve been reponed as 5.02 rather than J4.31. • significantly above z.ero at the 95% level. •• significantly above z.ero at the 99% level.
Appndlx C In this appendix we report tbe estimates of the dealer margin equation. As opposed to the original specifications. the following table uses the dealer margin as the dependent variable. Since the dealer's unit cost (cost of the car to the dealer) is part of the dependent variable, it is no longer used as either a regres.sor or as an instrumental variable. The growth rate variable as specified in appendix B (rather than the absolute growth varia ble or the original growth variable) was used in the analysis. All of the other explanatory variables are defined as they were in the original report. The dependent variable is simply defined as the difference of the log of retail price and the log of dealer's cost. This represents the percent markup to the dealer. Obviously, the estimated coefficient vector will change since we are nowexplaini~g dealer margins. The results in Tabl~-I show that in 8 of the 9 model types the interaction of the law and population growth variable, IAGRI. is still positive and significant. In the tables. coefficients with t- values of greater than or equal (in absolute value) to 1.96 are significant at the 95% level. The t-values are given under the coefficient and appear In parentheses. In response to WEFA's claim that the Staff Report model is a failure in explaining dealer margins. we present the chi-square statistic, which is a test for whether all the factors. when taken together, are stalistically significant. The critical chi-square value for the 99% significance Icve! in a 26
model with '12 facton is 26.22. The re,ult, In Table 1 show that all the models far exceed this critical value.u Table 2 reports the total impact of RMA laws in areas of growing population on the dealer margin for each model type.~ We obtain a statistical1y significant positive impact on dealer margins for 7 of the 9 model types. :6 In this appendix we use the chi-square statistic to test the significance of the model. The measure of goodness-of -fit used in the Staff ,Report was the SQuare of the correlation between the actual and predicted yalue of the dependent variable. However. even for a well specified model. we would not always expect a high correlation between the actual dealer margin and the predicted dealer margin especially when the prediction comes only from the supply equation and ignores the demand side of the model. For example. in the dealer margin equation presented in this appendix. the correlation between predicted and actual dealer margin for the 9 models are small (they range from .05 to .17 _. the square of these numbers will be close to zero) while the chi-squae statistics reveal that the factors in the model are significant at more that the 99% level of significance. :6 This estim:lted effect involves the combination of sam: of the estimated coefficients of the supply eGuation.
Appendix C - Ta ble 1 The Estimated Regression Coefficients for the Retail Supply Equation (or the Nine Chevy Auto Body-Types for 1978 (Dependent Variable-Dealer Margin) Variable Body Type Monte R egular D.r.1Q Maljbu CamarQ ~ C -.0450 -.0401 -.0854 .1379 -.1003 RNEW -.0053 -.0025 -.0050 .0028 -.0035 (-1.75) (-0.88) (-1.73) (0.96) (-1.25) ROLD -.1795 -.1311 -.1715 .0133 -.0955 (-3.01) (-2.40) (-3.05) (0.22) (-1.85) lAGRO .0195 .0139 .0183 -.0037 .0106 (2.85) (2.21 ) (2.84) (-0.54) ( 1.78) IAGRI 1.7217 1.5557 1.4993 2.9117 1.1881 (3.73) (3.59) (3.43) (6.69) (2.87) IAGRISQ -5.7698 -4.9421 -4.7864 -9.6570 -4.8222 (-1.98) (-1.82) (-1.73) ( -3.59) (-1.85) WAGE .0192 .0204 .028\ -.0087 .0317 (2.04) (2.31 ) (3.11 ) (-0.96) (3.59) ADY -.0042 -.0027 -.0041 -.0018 -.0030 (-3.42) (-2.42) (-3.55) (-1.55) (-2.70) DENS -.0033 -.0016 -.0020 .0014 -.0001 (-4.47) ( -2.34) (-2.88) (2.04) (-<l.18) GR -.0041 .0013 .0034 .0098 .0114 (-0.49) (0.17) (0.42) ( 1.22) (1.48) 'FORCE -.OJ i7 -.0188 -.0186 -.OOS 1 -.0064 (-3.22) (-3.71) (-3.57) (-1.61) (-1.28) CANCEL .0207 .0188 .0230 .0090 .0118 (3.87) (3.82) (4.53) ( 1.82) (2.44) LD -.0197 -.0161 -.0238 -.0127 -.0184 (-3.65) (-3.15) (-4.64) ( -:.49) (-3.n) Chi Square 106.64 105.65 138.83 209.09 123.85 :8
, . Appendix C - Table 1 (Continued) The Estimated RegressioD Coefficients for the Retail Supply Equation for the Nine Chevy Auto Body-Types for 1971 (Dependent Variable-Dealer MArgin) VjHjable Bodv Type Moon Chevette SpQrtvan Corvette C -.0422 -.1281 -.1444 .1645 RNEW -.0080 -.0062 -.0086 .0032 (-2.18) (-1.95) (-1.80) (0.36) ROLD -.1443 -.1596 -.1096 .2982 (-1.95) (-2.44) (-1.02) (1.71) lAGRO .01497 .0162 .0109 -.0395 ( 1.76) (2.16) (0.87) (-1.97) IAGRI .8204 1.7638 .. 1.6019 3.1715 ( 1.54) (3.67) (3.20) (2...38) IAGR1SQ .7973 -4.1036 -3.9513 -1.9699 (0.24) (-1.36) (-lAO) (~.24) WAGE .0027 .0360 .0321 .0066 (2.05) (3.61 ) (2.05) (0.24) ADY -.0027 -.0054 -.0067 .0001 (- 1.8 I) (-4.25) (-3.41) (0.03) DENS -.0014 -.0004 -.0014 -.OOD (-1.50) (-0.54 ) (-1.28) (-3.71 ) ~GR .0181 -.0055 -.0080 -.0::8 (1.83) (-0.63) (-0.60) (~.92) FORCE -.0145 -.0145 -.0146 -.0029 (-2.24) (-2.50) (-1.98) (~.18) CANCEL .0206 .0243 .C2~ 3 .01l9 (3.31 ) (4.33) (3.6 J) (0.76) LD -.0237 -.0:44 -.0103 .0224 (-3.80) (-4.35) (-1.45) ( 1..39) Chi Square 115.85 191.24 77.99 46.73 29
.'. . Appendix C - Ia ble 2 The Impact of the RMA La 90'S on Dealer Margins for Chevrolet Cars in 1978 Body Type Regular Malibu Camara Nova Monte Carlo MODza Chevette Sportvan Corvette Average Percentage Markup (Dealer M:rgjn) Change For Areas with Positive population Growth 3.69 0 3.41 0 • 8.17 0 • 2.23 4.07 0 7.67 00 5.15·· 3.42 16.tl9°· • significantly above zero at the 95% level. ~o significan tly above zero at the 99% level. 30
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