Competition Bureau Finds No Lack of Competition In The Auto Body Repair Industry

OTTAWA, August 20, 1999 — The Competition Bureau, after completing an extensive examination of a major market in the Canadian auto body repair industry, has concluded that the practice of directing insured vehicle owners to preferred auto body repair shops has not substantially lessened competition. Therefore, there are no grounds to warrant an application to the Competition Tribunal for a remedial order.

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 auto body shops resulted in reduced business for non-preferred or independent auto body shops and lessened competition in auto body 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 labour 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 labour rate set by the insurance company.

In sum, the complainants alleged that the insurance companies were suppressing the market price or labour rate, including that of the independent auto body shops and directing auto body 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 auto body 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 auto body 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 auto body repair market. In certain cases, this redistribution has resulted in reduced business for some auto body repair shops. Although this practice has lead to increased pressure on certain auto body 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 auto body 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 auto body repair in recent years have been fairly stable with any price increase being marginal;
• Demand for auto body repair, as measured by the number of claims made by insured vehicle owners for auto body repair services in the market, have been declining over the past 4 years;
• Because of the large number of auto body repair shops competing in the market, even if a number of auto body 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 auto body repair market that there is no likelihood of a sustained price increase in repair costs above competitive price levels. Any upward pressure on auto body repair prices would encourage entry of new auto body repair shops in the market which 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.

On the basis of the facts uncovered during our examination, and for the reasons noted above, there are no grounds to proceed with an application to the Competition Tribunal and the examination is closed.

For further information, please contact:

Richard Taylor
819-997-1990