Tesla’s War on Intermediaries

While we were learning about network models of markets with intermediaries, I kept thinking back to the whole Tesla and New Jersey issue. The basic premise behind the entire issue is that Tesla essentially sells directly to consumers which eliminates the need for car dealerships.  The New Jersey dealers feared this because it would set a precedent that other car manufacturers could follow, and that is of directly selling to the consumer.  Their fear arises from the very problems we saw in class that if a price can be set at “X” by any intermediary to a buyer then all the other intermediaries will need to either offer the same price or better in order to have a chance of participating in the transaction.  Lets take this a step farther and say that a seller is able to directly reach the buyer this would allow for a price to be reached that would be inherently lower then what intermediaries would like, but in order to participate in the transaction they will have to offer a price at either the same or a better price.  In this situation the seller can offer a price that is a Nash Equilibrium because the intermediaries will not able do any better and given this will not make any profit.  Applying this to the situation with Tesla, Tesla has just become the seller that can reach the buyer and thereby has created a situation in which there is no incentive for intermediaries to enter into the networks.  This threat of the car dealers becoming irrelevant is exactly what they, the car dealers, are afraid of.   Essentially all car manufactures could begin selling directly to consumers at a price that is slightly higher then what they would have received from selling to the car dealers.  The car manufacturers would benefit from the additional revenues, but the car dealers would have to offer a much lower price to even stay competitive.  It could additionally be reasoned that the car manufactures could just sell their cars at wholesale, dealer price, because they would be no better off or worse off.  The advantage to this is that they may be able to beat out their competition, other car manufactures, based solely on their costs to manufacture the car.  Any of these options seemingly make the car dealer obsolete.  In many ways Tesla has also shown that car dealerships are a convention created in the past.  By this I mean they have shown how the internet allows car orders to be made and the cost of reaching and selling to the consumer is now much lower than it was in the past.  Car dealerships came about due to the lack of a better network at the time.  The only way a car could really be sold is either by going door to door, which Ford did early on, or by creating a place for consumers to come and purchase the cars.  The second is far more efficient and therefore less costly, and this why dealerships became the mainstay.  But, in a world that offers new and better methods it is only through regulations that these old networks are allowed to remain.  Which is exactly what Tesla is facing and fighting to have overruled. It is interesting to see a real life example of how technology can change and cause networks to evolve.  It is also quite interesting to think of how many “old types” of networks still exist due to regulations that prohibit more efficient “new network”.

Article: http://www.thecarconnection.com/news/1091249_musk-vs-christie-tesla-sues-new-jersey-for-the-right-to-sell-cars

One thought on “Tesla’s War on Intermediaries”

  1. Great job in connecting Nash Equilibrium to the car market. This is an interesting article about how the balance of power in the network is changing. The article mentioned that many states have already allowed Tesla to do business, their way, in many states. I wonder if Tesla will start a new trend in car dealing. It is true that Tesla faces an uphill battle in the car manufacturing industry. I am interested to see how Tesla continues to sell cars and if their way of selling car may create new manufacturers of cars.

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