[AASP/MA] FEATURE
by Fred Jennings, Jr., EconoLogistics
Labor RatE:
Facts, Fiction and the Future - Part 5 ( An Economist’s Perspective ) Editor’s note: For this latest installment in our ongoing series on the Labor Rate, we welcome economist Fred Jennings, Jr. for his third in a series of articles that will feature his research and perspectives on the issue. We thank Fred for his contributions and welcome reader feedback on any of the topics he presents. This is my third in a series of four articles that take an in-depth view into the Labor Rate issue. The first installment described the current situation and discussed the 1963 Consent Decree and litigation involving the collision repair industry. The second piece examined the real level of Labor Rates in a market not controlled by insurers, using widely accepted methods of economic evaluation to show why Labor Rates in an uncontrolled market would exceed the prevailing free-market level of auto mechanical Labor Rates. This third part will address two arguments: Auto insurers maintain an “efficiency argument” that their control of the collision repair market benefits policyholders by cutting costs and premiums, while the collision repair industry adopts a “market power interpretation” that auto insurers’ behavior neither benefits policyholders nor protects consumers’ safety. The fourth part will test these views, based on a statistical analysis of geographical Labor Rate patterns. The analysis will be explained, its method described and the findings reported and interpreted. Introduction The auto insurance industry justifies its suppression of Labor Rates with the claim that its referral/program shop system is efficient and also reduces cost to consumers. Some collision repair providers contend that this system is not efficient and involves an abuse of market power against the consumer and the auto body industry. Many complaints brought by collision shops against insurers have been filed based on alleged violations of fair trade and antitrust statutes. But the general issues surrounding these conflicting claims 20 March 2021
New England Automotive Report
of efficiency versus market power need further attention. First, I will look at market power: What it means, why it matters and how we might think about its effects. Second, I will consider the question of how we might determine whether auto insurers’ control of collision repair is efficient or not. Third, I will address some factual information that might help to resolve this question. Fourth, I will anticipate what my final article in this series might show about this controversy. Market Power Economics is about choice; the more options you have, the better. The antitrust laws are intended to protect our range of options from attempts to narrow or restrict them. After all, if a seller can limit buyers’ options, they are more likely to buy from that seller. The same principle applies to buyers trying to limit suppliers’ options. The argument goes like this: Monopoly Power: When you have a single seller (or just a few sellers with oligopoly, so they can collude much like a monopoly), that seller can raise prices and restrict output to consumers if such behavior enhances monopoly profits, at least in the short run. In normal markets, such high profits attract competitive entry, which brings those profits down to “normal” levels. Competitive entry does not occur for some reason, so consumers are not served more efficiently at competitive prices. The monopolist is somehow protected from these market forces.1 Monopolies involve an abuse of market power by sellers against final buying consumers in the form of higher product prices that consumers have to pay. Monopsony Power: Monopsony power is a bit different, because instead of facing downstream (being used against consumers), it is used by buyers against suppliers, squeezing their prices and profits. In a manufacturing context, a monopsonistic price squeeze against suppliers pushes them back down an upwardsloped supply curve (under normal assumptions), thus reducing costs
