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COMPETITION
BUREAU FINDS NO LACK OF COMPETITION IN AUTOBODY REPAIR INDUSTRY
The
Competition Bureau, after completing an extensive examination of
the Canadian autobody repair industry late last year, has concluded
that the practice of directing insured vehicle owners to preferred
autobody repair shops has not substantially lessened competition.
The
Competition Bureau carried out this examination between September
1997 and June 1999. The examination included a review of information
provided by numerous complainants, Bureau historical information
and publicly available data. As well, investigators conducted extensive
interviews with industry participants.
The
complainants claimed that the practice by auto insurance companies
of directing insured vehicle owners to preferred autobody shops
resulted in reduced business for non-preferred or independent autobody
shops and lessened competition in autobody repair services. It was
also claimed that insurance companies:
- Limited
the number of preferred shops which precluded qualified independent
shops from becoming preferred shops.
- Required
preferred shops to provide a discount on the hourly labor rate
and on parts, and to cut costs by only using generic replacement
parts.
- Would
only pay independent shops for vehicle repair at a predetermined
labor rate set by the insurance company.
In
sum, the complainants alleged that the insurance companies were
suppressing the market price or labor rate, including that of the
independent autobody shops and directing autobody repair business
to preferred shops. The Bureau recognized the potential for such
business practices to be anti-competitive and raise an issue under
the Competition Act, if they led to a substantial lessening of competition.
The
Bureau looked for any evidence that the practices had resulted in
a substantial lessening of competition, which is the essential requirement
under the civil provisions of the Competition Act, such as tied
selling (section 77) and abuse of dominant position (section 79).
Whether a practice results, or is likely to result, in a substantial
lessening of competition involves not only determining whether there
has been a redistribution of business or a reduction in the number
of competitors, but also whether there had been or is likely to
be an increase in prices to consumers. For this to happen there
must be barriers to new autobody repair shops entering the market
which would allow a dominant player to raise prices to a level that
would be higher than in a competitive market.
Individual
autobody repair shop owners are facing economic pressures resulting
from the highly competitive marketplace in which they operate. The
Bureau concluded that the preferred shop system established by some
insurance companies has contributed to the redistribution of business
within the autobody repair market. In certain cases, this redistribution
has resulted in reduced business for some autobody repair shops.
Although this practice has lead to increased pressure on certain
autobody repair shops, these factors alone were not sufficient to
lead the Bureau to conclude that there has been a substantial lessening
of competition.
The
Bureau concluded that the practice of directing insured vehicle
owners to preferred autobody repair shops has not resulted in, nor
is it likely to result in a substantial lessening of competition
including an increase in prices in the future for the following
reasons:
- The
insurance market is characterized by vigorous competition which
ensures that any cost control or saving, in part by reliance on
preferred shops, benefit consumers in terms of premium calculations
- Prices
for autobody repair in recent years have been fairly stable with
any price increase being marginal
- Demand
for autobody repair, as measured by the number of claims made
by insured vehicle owners for autobody repair services in the
market, have been declining over the past four years
- Because
of the large number of autobody repair shops competing in the
market, even if a number of autobody shops were to exit as a direct
result of the directing of insured vehicle owners by insurance
companies, there would be sufficient competition remaining in
the marketplace to prevent price increases
- Individual
insurance companies hold sufficient buying power to prevent suppliers
from increasing prices above competitive levels
-
Barriers to entry are sufficiently low in the autobody repair
market that there is no likelihood of a sustained price increase
in repair costs above competitive price levels. Any upward pressure
on autobody repair prices would encourage entry of new autobody
repair shops in the market that would in turn lead to a return
to competitive price levels.
The
Bureau found that there are legitimate competitive business reasons
for insurance companies to establish preferred shops. First, it
is a service to those customers who demand a list of shops meeting
insurance company criteria such as service and quality of repair.
Consumers have the final choice in selecting where to take their
vehicle for repairs. This choice is protected by provincial regulation
enforced by provincial authorities. Second, insurance companies
rely on preferred shops programs as a means of cost control and
cost saving. This having been said, the existence of these business
reasons would not have prevented the Bureau from pursuing the matter
further had the practice led to a substantial lessening of competition.
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