Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

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Today is June 5th, 2009. My guest is Michael Munger, Chair of Political Science and Professor

of Economics at Duke University, and Mike is currently visiting Friedrich Alexander University

at Erlang in Nernberg. Mike, welcome back to econtalk. It's a pleasure to be back.

Mike, our topic for today is the strange world of franchising and dealerships, the way that

corporations sometimes distribute their products out into the retail space. And it's in the news

because Chrysler and GM are shuttering a lot of dealerships, they're closing them down, and it

raises a question of this somewhat unusual form, the idea that GM, unlike, say, Apple. Apple

has a thing called an Apple store that's an app part of Apple, but GM doesn't have a GM store

in the same way. It has an independently owned thing called a dealership, and of course, as they

shut these down, there are some legal issues that we'll probably get into a little bit later on,

but I thought we'd start by talking about just the nature of this kind of institution and why it

might make sense at all. Yeah, we had talked a little bit a week ago about the topic we might

take up, and franchising is something that's always interested me. So I spent a little time

reading about why this kind of odd arrangement exists, and people that originally

speculated that the reason automobiles were sold through these franchises was that capital markets

were imperfect when automobiles first started to be sold. And then during the 30s, it was

difficult to raise money because you didn't really have, if you had cars, people didn't want to buy,

...