This is the Cato Daily Podcast for Monday, March 24, 2014.

I'm Caleb Brown.

Tesla Motors makes premium electric vehicles.

There's just one problem for protectionists in a few states.

Tesla owns their own dealerships, a large shift away from the traditional model in the U.S.

So some states have shut Tesla out completely.

Peter Van Doren, editor of Regulation magazine, comments.

Auto dealerships and automakers have perhaps an odd relationship.

The car makers don't own dealerships.

And dealerships don't make cars.

Correct.

So why does that relationship exist the way it does? Well normally and when a when if a student would ask that question in an economics class we would say the answer to that question of when are what is the nature of

relationships between producers and distributors we would turn to Ronald Coes and

his first incarnation, 1937.

It's an article called The Theory of the Firm.

And it tries to explain why some things are done through market relationships and why other things are done

through command and control within an ownership structure, i.e. vertical integration.

Its answer is, and everyone who knows, Coz knows, his answer is and everyone who knows Coe knows his answer is always transaction

costs that is if the costs of doing business through arm's length relationships and contracts is transaction cost filled,

then the firm buys up that relationship and conducts it through command and control because that saves money.

So the price of writing a really long detailed contract with contingencies and delivery times and all that stuff, that can be quite high.

It's expensive and it takes expensive talent to write the contracts.

...