Alleged Anti-Competitive Acts in the Auto Glass Industry in Canada

Backgrounder

May 07, 1999

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Background

The purpose of this document is to outline in general terms the findings of the Competition Bureau’s examination of complaints received from 110 independent glass shops owners against alleged anti-competitive practices by some automobile insurance companies, auto glass management networks and auto glass chains.

The reader will take note that the Bureau’s policies and practices regarding the treatment of confidential information limit its ability to disclose specific information obtained during the course of an examination. However, the general findings of the Bureau on the relevant issues are summarized below.

Information Gathering

The Bureau’s review included information provided by the complainants, other market sector participants, historical information relating to the Bureau’s previous reviews and publicly available information. The review also included an economic analysis of the alleged anti-competitive practices and their impact on competition in the auto glass industry.

The Complaints

The complainants alleged the following:

1. that directing practices by auto insurance companies and auto glass networks to preferred auto glass shops have favoured auto glass chains and have had anti- competitive effects against independent glass shops;
   
   
2. that insurance companies, auto glass networks and auto glass chains conspired to reduce competition unduly in the auto glass market;
   
   
3. that prices established by insurance companies, auto glass networks and auto glass chains were so low that they would be below costs and only for the purpose of forcing independent glass shops to exit the market.

This is the second examination conducted by the Bureau regarding the auto glass industry within the past six years. An inquiry was held in 1994-95 and the Bureau concluded at that time that practices of directing to preferred shops did not raise an issue under the Competition Act because the low barriers to entry in the auto glass industry and the buying power by insurance companies would prevent any competitor from raising prices above competitive levels in the auto glass industry in the future.

The Markets

Automobile Insurance Industry

The automobile insurance industry in Canada is regulated by provincial authorities. It is a $10 billion a year market. It is a highly competitive market with 73 insurance companies competing in Canada. Glass coverage is part of comprehensive coverage in auto insurance policies and the deductible varies from $50 to $300 depending on the province. Our analysis of this market concluded that competition is strong in the auto insurance market and that no single company or group of companies dominates this market.

Auto Glass Management Networks

Until about 18 months ago, insurance companies handled and processed all their glass claims in-house. In 1997, 10 years after they were introduced in the US market, auto glass management networks appeared in the Canadian market. While a number of insurance companies have joined a network, a large number of them are still handling their own glass claims.

A glass management network enters into an agreement with an individual insurance company to handle all its glass claims on its behalf. A toll free number is established and those insured with this company call this number to make a glass claim. The following points are covered in the majority of calls:

• a preliminary assessment of the damages and whether repairs can be performed or replacement is necessary;
  
  
• an appointment is made with a glass shop, if the insured has no preference, a “preferred shop” will be suggested for inspection; if the insured wants to go to a specific shop, this choice will be respected;
  
  
• after the inspection, the insured will again have the choice of having the repair done at the inspection site or go to another shop;
  
  
• after the repair or replacement is done, the glass shop will send the invoice to the network;
  
  
• the network will send all invoices from the same insurance company to this company and receive payment;
  
  
• the network will then pay the glass shop which performed the work.

Auto Glass Market

This is a competitive market in Canada with a number of chains and independents participating in most markets; there are over 3,000 glass shops whose main activity is the replacement and repair of auto glass and another 1,000 that do auto glass work on a part time basis.

This market is in transition in Canada because of various factors which have contributed to a reduction of the total market for auto glass, including:

• the introduction by insurance companies of new auditing requirements and pre-work assessments carried out by a company’s agent or nominee;
  
  
• the reduced number of instances of replacement due to the introduction of lower costing repair technology;
  
  
• the increase in volume discounts to insurance companies;
  
  
• the rise in deductibles for glass coverage to $300 from $100 in Ontario.

As a result, prices for auto glass services have fallen in the past two years. We have no evidence that declining prices are the result of using lower quality materials.

No auto glass company singlehandedly or jointly dominates these markets and none would be able to dictate price increases above competitive levels because auto insurance companies, being the main purchaser of auto glass service, would prevent such a price increase by using their buying power. Another factor preventing significant price increases is that there are no significant barriers to entry in this industry; a large price increase would likely attract new entrants to the market that would restore lower prices.

The Analysis under the Competition Act

The Bureau conducted an extensive examination of the complaints. Moreover, we reviewed the allegations under the following sections of the Act :

• s. 77 (tied selling and exclusive dealing)
  
  
• s. 50 (1)(c) (predatory pricing)
  
  
• s. 45 (conspiracy)

Tied Selling

Tied selling exists when a supplier, as a condition of supplying a particular product, requires or induces a customer to buy a second product. It may also occur when the supplier prevents the customer from using a second product with the supplied product.

In the present circumstances, the supply of auto insurance services by the insurance company would be the potential tying product and the acquisition of auto glass services from a nominee of the insurance company would be the potential tied product.

To make an application to the Competition Tribunal pursuant to section 77(2) of the Act, the Commissioner of Competition would :

• first have to be satisfied that tied selling had occurred;
  
  
• that it was being engaged in by a major supplier of auto insurance, or that it was widespread in the auto insurance market;
  
  
• that it was likely to impede entry into or expansion of a firm in the auto glass repair market.

If these criteria are satisfied, it would then have to be shown that, as a result of the tied selling practice, competition is, or is likely to be, lessened substantially in the auto glass repair market.

If such were the case, the Competition Act provides that the Commissioner of Competition may seek an order from the Competition Tribunal prohibiting the tied selling or containing any other provision which in the Tribunal’s view is necessary to overcome the effects of the tied selling.

In so far as directing may be viewed as tied selling, we pursued our examination and looked at the other conditions that must be met to seek an order from the Competition Tribunal. Our examination confirmed that directing to preferred shops is widespread in the market, constitutes a practice and has an exclusionary effect in that it excludes some auto glass shops from obtaining business from some insurers. It should be noted that while we recognize that directing takes place, we understand that it is not mandatory. During the course of this examination, we found no evidence that this choice is not available to consumers. This principle is mandated by provincial legislation and the provincial regulator could intervene should this principle not be adhered to by insurance companies.

The last condition that has to be met is that the practice result or is likely to result in a substantial lessening of competition. Addressing this issue involves not only determining whether there has been a reduction in the number of suppliers but also whether there had been or is likely to be an increase in prices to consumers. We also looked at barriers to enter the auto glass industry and whether a dominant player in this market would be able to raise prices to a level that would be higher than in a competitive market.

In looking at the auto glass industry, we concluded that savings are attained in part through the use of the practices in question and that these savings are being passed on to consumers. Also, barriers to enter the auto glass industry are low and insurance companies, being the main buyers of auto glass services, have enough buying power to prevent suppliers from raising prices to a level that would be above competitive levels: insurance companies would take their business elsewhere. In addition, because of the low barriers to entry, any success in increasing prices above competitive levels would be short lived and would lead to new entry in the market and to the return of competitive price levels. Thus, we concluded that the practice of “directing to preferred shop” has not reduced and is not likely to reduce competition substantially in the future and that it does not raise an issue under the tied selling provisions of the Competition Act.

Exclusive Dealing

Exclusive dealing is a requirement by a supplier of a product, as a condition of supplying the product to a customer, to deal only primarily in products supplied by or designated by the supplier or must refrain from dealing in a specified class of or kind of product except as supplied by the supplier or its nominee.

If we apply the definition of exclusive dealing to the current allegations, the “supplier of a product” would be an insurer and the product supplied would be auto insurance coverage. The insurer would impose on the insured the condition to deal exclusively with its nominee, the auto glass chain, in case of a glass claim. Viewed this way, an argument can therefore be made that directing amounts to exclusive dealing. Like s. 77 (tied selling), to seek an order from the Competition Tribunal, we must show that there is substantial lessening of competition resulting from the exclusive dealing. This criteria cannot be met for the same reasons as those provided under the analysis of the tied selling provisions of the Act.

Predatory Pricing

The first stage in the analysis of the predatory pricing provisions of the Act, is to determine whether the alleged predator has the market power to unilaterally increase industry pricing if it is successful at driving competitors from the market. It includes, among other factors, an analysis of the conditions of entry into the relevant market. If the alleged predator is found to have market power, then the analysis goes to the second stage where we look at the relationship of price to the cost of production. Our analysis has demonstrated that no insurance company, network or auto glass chain possesses sufficient market power to dictate price in the auto glass repair/replacement industry because entry is relatively easy in the auto glass service sector and because insurance companies possess enough countervailing power to prevent prices from being raised in the future. In conclusion, the practices do not raise an issue under the predatory pricing provisions of the Act.

Conspiracy

Some complainants alleged that insurance companies, auto glass networks and auto glass chains conspired to reduce competition unduly in the auto glass market. In the course of this examination, we have found no evidence that insurance companies, networks and auto glass chains conspired to fix prices of windshield replacement. Accordingly, there is no basis to support the allegation made in this regard.

Conclusions

The auto insurance and auto glass industries are competitive in Canada. They both are industries in transition. New methods such as auto glass management networks are being introduced by some insurance companies to keep costs down. These new methods combined with external factors such as changes in deductibles and greater use of repairs over replacements have reduced the overall available market for auto glass services. Savings flowing from these policies contribute to savings to consumers of auto glass services in the form of stable or declining premiums.

It must be noted that a reduction in the number of competitors does not equate, in this case, to a reduction in competition; the purpose of the Competition Act is to protect competition and not competitors. Our analysis revealed that no company in the auto glass industry would be able to exercise market power; i.e. to increase prices above competitive levels for a significant period of time. Any attempt to do so would trigger a reaction from the main buyers of this service, insurance companies, and could also convince potential new entrants in the auto glass industry to enter the market, since barriers to entry in this industry are low.

For all the reasons mentioned above, there are no grounds to make an application to the Competition Tribunal; therefore, the examination was closed.