Research

Work in Progress

Downstream Concentration in Regulated Vertical Relationships: Car Dealerships in Texas

This paper provides the first merger retrospective of automobile dealerships, using detailed transaction and registration data from Texas to study the competitive effects of increasing downstream concentration under state franchise law. Despite large changes in local market structure when dealerships are acquired by dealer groups, I find little to no impact on prices or quantities sold. Instead, the results uncover a previously undocumented mechanism through which manufacturers discipline dealer behavior despite statutory prohibitions on many standard vertical restraints. Manufacturers use discretionary vehicle allocations to shape dealers’ product assortments, reallocating high-demand models and trims in ways that affect markups, sales, and investment incentives. Evidence from merger events, spillovers across dealerships, and a legal case study indicates that this mechanism mitigates downstream market power and alters the economic consequences of dealer consolidation. These findings challenge prevailing views of dealer consolidation and franchise regulation and imply that the manufacturer–dealer relationship may be more efficient than previously assumed.