FTC Staff Comment to the Hon. Joseph E. Haines Concerning H.B. 302 to Regulate the Sale of Aftermarket Crash Parts

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UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLEVELAND REGIONAL OFFICE
Decem ber 18, 1989
V890014
The Honorable Joseph E. Haines
House of Represen tatives
State of Ohio
State House
Columbus, Ohio 	43215
Dear Representative Haines:
The staff of the Federal Trade Commission1 is pleased to respond to your
invitation for comments on House Bill 302, which regulates the sale of "aftermarket
crash parts" and mandates the disclosure of certain types of information about these
parts. 	As you have requested, we are providing comments on the consumer welfare
and competitive effects of the proposed statute. 	We believe that the Bill contains
provisions that might substantially reduce competition and consumer choice in the
market for crash parts. Additionally, although the Bill's disclosure requirements may
increase consumers' information, we suggest that the General Assembly balance the
possible costs of mandated disclosure against the perceived benefits from it.
L 	INTEREST AND EXPERIENCE OF THE STAFF OF THE FEDERAL TRADE
COMMISSION.
The Federal Trade Commission ("FTC") is charged with promoting competition
and 	protecting consumers from 	unfair and deceptive 	commercial 	practices? 	In
fulfilling this mandate, the staff of the Federal Trade Commission often submits
comments, upon request, to federal, state, and local governmental bodies to help
assess the competitive and consumer welfare implications of pending policy issues.
1 	These comments are the views of the staff of thc Cleveland and Los Angeles
Regional Offices and Bureau of Economics of the Federal Trade Commission. 	They
are not necessarily the views of the Commission or of any individual Commissioner.
2 	See 15 U.S.c. § 41 et seq.

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 2.
In the course of its law enforcement activities, Commission staff has become
familiar with the issues relating to competition in the market for "aftcrmarket crash
parts." 	In particular, in General Motors Corporation,3 the staff investigated the effects
of General Motors' crash parts distribution system on independent wholesalers, body
shops, and others.
More generally, the Commission staff has frequently analyzed the effectiveness
of 	advertising 	and 	labeling 	in 	providing 	consumers 	with 	reliable 	product
information,4 and 	has examined 	the 	need 	for disclosure statements 	in situations
where the unregulated market may fail to provide adequate information.5
II. 	DESCRIPTION OF HOUSE BILL 302.
House 	Bill ·302 	(the 	"Bill") 	contains 	several 	provIsions 	that 	regulate 	the
marketing and use of aftermarket crash parts.6 First, repair facilities, installers, or
insurers 	cannot 	impose 	a 	greater 	charge 	upon 	a 	person 	who 	demands 	original
3 	-
99 F.T.c. 554 (1982).
4 	Working papers and reports published by staff members in the Bureaus of
Economics 	and Consumer 	Protection of 	the 	Federal Trade 	Commission 	include:
M. Lynch, et al., 	Experimental Studies of Markets with Buyers Ignorant of Quality Before
Purchase: 	When Do "Lemons" Drive Out High Quality Products? (1986); M. Frankena, et al.,
Alcohol Advertising, Consumption, and Abuse (1985~
5 	See the following FTC staff reports and comments: Ippolito and Mathios, Health
Claims in Advertising and Labeling: 	A Study of the Cereal Market (1989); Calfee and
Pappalardo, How Should Health Claims for Food Products Be Regulated? (1989); comments
to 	Food Safety and Inspection Service, United States Department of Agriculture, on the
Standard for Frankfurters and Similar Cooked Sausages, Docket No. 85-009E, 52 Fed. Reg.
2415 (June 22, 1987 [Final Rule, 9 C.F.R. Part 319]); and comments to Food Safety and
Inspection Service, United States Department of Agriculture, on Labeling of Meat Food
Products, Under Certain Circwnstances, that Contain Mechanically Separated (Species), Docket
No. 86-049P, 9 C.F.R. 317, Nov. 8, 1988.
6 	As defined in the Bill, "aftermarket crash part" means a replacement for any
of the 	non-mechanical sheet metal or plastic parts that generally constitute 	the
exterior 	of -a 	motor 	vehicle, 	including 	inner 	and 	outer 	panels. 	A 	"non-OEM"
aftermarket crash part is one not made by or for the manufacturer of the motor
vehicle.

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 3.
equipment 	manufacturer ("OEM") parts than 	would 	have 	been imposed 	had 	the
person accepted non-OEM aftermarket crash parts. 7
. Second, if a consumer requests a written estimate,S the repair facility or the
installer must supply to the consumer an estimate that contains a listing of each
non-OEM aftermarket crash part intended for use and have attached, or printed on
the estimate, a statement that discloses to the customer that:
This 	estimate 	has 	been 	prepared 	based 	on 	the 	use 	of
aftermarkct crash parts supplied by a source other than the
manufacturer 	of 	your 	motor 	vehiclc. 	Nonoriginal
equipment manufacturer aftermarket crash parts, most of
which are 	not 	made in the United States, may 	vary in
terms of quality, fit, performance, and warranty from the
original parts supplied on your vehicle. 	Failure of these
parts and other parts of your vehicle that are attributable
to 	the 	use 	of 	nonoriginal 	equipment 	manufacturer
aftermarket 	crash 	parts 	may 	not 	be 	covered 	by 	your
vehicle's 	manufacturer's 	warranty 	or 	by 	guarantees
provided by the repair facility or installer.
Third, if the person requesting the repair chooses to receive an oral estimate
or none at all, the repair facility or installer must provide to the person a similar
disclosure statement 	The same disclosure documcnt as is given 	with a 	written
estimate must be provided with the final invoice.
fiL 	THE COMPETITIVE EFFECTS OF ILB. 302.
The apparent purpose of H.B. 302 is to protect uninformed consumers from
purchasing 	allegedly 	low-quality 	or 	overpriced 	non-OEM 	replacement 	parts.
Whether there now exists substantial quality or price variation between OEM and
7 	Insurers are prohibited from requiring the use of non-OEM aftermarket crash
parts as a precondition of payment for a repair. Also, the Bill would require insurers
to provide to consumers a written disclosure stating that customers may refuse to
accept the use of non-OEM aftermarket crash parts in the repair of the damaged
vehicle. 	We do not comment on these aspects of H.B. 302.
S Under current Ohio law, if the anticipated cost of a motor vehicle repair
exceeds twenty-five dollars, the consumer is entitled to an estimate of the cost of
repairs, and at the consumer's option, may receive the estimate in writing, orally, or
waive the estimate. Ohio Admin. Code § 109:4-3-13 (1978~

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 4.
non-OEM parts is a factual question that we do not address here. 	We note, however,
that some consumers might prefer a lower quality part if its price is also lower. The
primary adverse effect of H.B. 302, if enacted, is that the res~raints on the prices
repair shops could charge for OEM parts may make it more difficult for consumers
to make such price-quality trade-offs.
It may be that some consumers of auto repair parts are not knowledgeable
about the alternatives that exist in this market, and are thus not well situated to
make an informed choice between parts of different quality. 	If the legislature finds
that a significant information problem exists, government regulation designed to
provide adequate information may be appropriate. 	Section IV of these comments
discusses whether such an information problem is likely to exist in the crash parts
market, and discusses whether H.B. 302's disclosure provision is likely to remedy any
such problem.
A. 	Trade-offs and Consumer Choice.
A 	consumer's choice of replacement 	part quality will 	be determined 	by a
number of factors, such as the relative prices of low- and' high-quality parts, the
relative quality of these parts, the age and pre-crash condition of the vehicle. 	(The
existence of third-party coverage for many auto body repairs will likely also alter
consumers' incentives to make these price-quality trade-offs. 	We offer no comments,
however, on 	how 	consumer 	incentives 	might 	be 	altered 	in 	this 	respect.) 	It 	is
plausible that some consumers would prefer to purchase lower quality parts, provided
that their price is low enough. 	For example, an owner of an older automobile may
prefer lower quality crash parts - at lower cost - because the life expectancy of the
vehicle is short 	The owner of a newer automobile, by contrast, might be willing to
pay a higher price to obtain a higher quality part 	Consumers are better off when
they have the ability to make choices reflecting their preferences, for quality.
House Bill 302 could substantially impair the ability of consumers to make
such 	trade-offs. 	Subsection 	(D), 	in 	part, 	states 	that 	"no 	repair 	facility 	[or]
installer ... shall impose a greater cost upon a person who refuses to accept the use
of 	non-oEM 	aftermarket 	crash 	parts 	than 	would 	have 	been 	imposed 	with 	the
acceptance of non-OEM crash parts." 	This provision attempts to equalize the prices
of OEM and non-OEM parts, thus eliminating perhaps the only attraction of non-
OEM parts, assuming that consumers perceive the quality of non-OEM parts to be
below that of OEM parts.9
9 	While we take no position on the actual extent of quality differences between
OEM and non-OEM parts, we think it likely that many consumers currently perceive
OEM parts as being superior to their non-OEM counterparts, which would result in
OEM parts commanding a higher price than non-oEM parts.

The Honorable Joseph E. Haines
House of Representatives~State of Ohio 	Page 5.
If consumers do not perceive that OEM and non-OEM parts differ in quality~
they may still base their purchase decisions on attributes of repair parts other than
price, e.g., on whether the parts were manufactured domestically. 	Otherwise, the
prices of OEM and non-OEM repair parts would tend to equalize~ since consumers
would 	regard 	OEM 	and 	non-OEM 	parts 	as 	close 	substitutes 	for 	one 	another.
Whether consumers actually base their purchases on attributes other than price and
quality is unknown. 	However~ if they do, and if information available to consumers
about these product attributes is in some way inadequate, one possible solution would
require the disclosure of currently unavailable relevant information~ such as the
manufacturer's name~ or the country of origin of the part. This is different from the
approach taken in subsection (B) of H.B. 302~ which requires that the repairer disclose
that many non-0EM parts are made abroad, but does not require the disclosure of
any specific information about the particular manufacturer that the repairer intends
to use. 10
B. 	Quality Variations and Product Availability.
Even if quality variations do exist~ Subsection (D) may increase the cost to
consumers of shopping for desired combinations of price and quality in repair parts.
Repair shops currently have an incentive to install either OEM or non-OEM parts,
depending upon a particular customer~s preferences and the prices (to the repair
shop) of OEM and non-OEM parts. 	As a result~ consumers may be able to obtain
valuable 	information 	about 	the 	price-quality 	trade-off 	at 	a 	single 	body 	shop.
Subsection (D) would reduce any individual repairer~s incentive to offer both OEM
and non-0EM parts 	thereby making it more difficult for consumers to shop for
automotive repairs.II The bill may also increase the overall price of automotive
repairs and limit the availability of non-OEM parts.
Subsection (D) would reduce repair shops' incentives to offer both OEM and
non-OEM 	parts 	because 	it 	would 	permit 	a 	shop 	to 	quote 	only 	one 	rate 	to 	a
prospective customer, regardless of whether the shop planned to install OEM or non-
OEM parts. 	For example~ if a shop prepares an estimate that reflects the lower price
of non-OEM parts~ and the customer subsequently refuses to allow non-OEM parts
to be used, the shop must either perform the repairs at the low price~ but using
10 Since many auto manufacturers are located overseas~ it will often be the case
that the OEM replacement parts are also manufactured abroad. 	In such instances~
disclosing that some non-OEM parts are imported may not provide the consumer with
much useful information.
11 The seminal article on search costs is Stigler~ The Economics of Inforrruuion, 69
1. POI... ECON. 213 (1961).

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 6.
higher cost OEM parts, or it must simply refuse the job. 	It cannot prepare a new
estimate reflecting the cost of more expensive parts.
Similarly, a repair shop cannot present a customer with two estimates, letting
the customer choose the price-quality combination that he likes best. This is because
the 	consumer 	could 	demand 	that 	the 	higher-quality 	(and 	higher-cost) 	parts 	be
provided at the low price, thus making the job unprofitable for the repairer. 	To
avoid this possibility, firms wishing to perform repairs using non-OEM parts might
find it necessary to specialize in the use of non-OEM parts. 	If such specialization
were to occur, a consumer wishing to obtain two estimates would have to visit two
different 	repair 	shopsP 	It would 	thus 	become 	more 	costly 	for 	price-conscious
consumers to shop for low-price repair estimates.
Subsection (D) actually may be even more restrictive than is suggested by the
preceding analysis. 	The discussion above assumes that the Bill would 	prevent a
repair shop from offering any particular customer two different prices. 	Subsection
(D) could 	be 	interpreted 	to 	mean 	that a shop cannot offer different customers
different prices. 	Suppose, for example, that two customers order the replacement of
a front fender on a 1980 Honda Civic, one of whom would be satisfied with non-
OEM parts, the other of whom would not. .subsection (D) may be read to prevent
the repair shop from charging the OEM customer a higher price than the non-OEM
customer, even though such an outcome would 	be the expected 	consequence of
normal competitive forces, and would be consistent with the preferences of auto
repair customers.
If this interpretation of subsection (D) is correct, repair shops would have
little incentive ever to perform repairs at a price that reflects the use of non-OEM
parts. 	Charging a low price would bind the shop to perform similar future repairs
at the same low price, irrespective of whether these future repairs use OEM or non-
OEM parts. 	Repair shops would have an 	incentive 	to use 	non-OEM 	parts, but
attempt 	to 	charge 	an 	OEM 	price. 	However, 	it 	would 	appear 	likely 	that 	most
customers would demand OEM parts at these higher prices. 	Even if they did not,
the direct gains from the use of low-price parts would accrue to the shops, not the
customers 	who 	purchased 	those 	parts. 	Unless 	some 	shops 	choose 	to 	specialize
exclusively 	in 	performing 	non-0EM 	repairs, customers 	wishing 	to 	have 	repairs
performed at a low price with non-OEM parts might find it more difficult to find
a shop willing to provide this service.
U Such specialization may itself be inefficient, and thus raise the costs of both
OEM and non-OEM repairs.

The Honorable Joseph E. Haines
House of Representatives, State of Ohio
IV. 	CONSUMERS' KNOWLEDGE OF CRASH PART QUALITY.
Page 7.
Quality variations between OEM and non-OEM parts that do exist could cause
consumer injury if consumers are unaware of these variations and purchase low-
quality (presumably, non-OEM parts) on the mistaken assumption that all parts are
of equal quality.13 	Existing industry institutions already have strong incentives to
convey information to consumers about differences, or the lack thereof, between
OEM 	and 	non-OEM 	crash 	parts. 	However, 	the 	proposed 	mandatory 	disclosure
provision may provide net benefits to consumers if those incentives are not strong
enough to provide consumers with adequate information and if the costs associated
with mandatory disclosure are relatively small.
There are two ways in which a consumer could be injured by the purchase of
a 	non-OEM 	part. 	First, 	a 	consumer 	may 	believe 	that 	an 	OEM 	part 	is 	being
purchased when in fact it is not. 	This consumer would clearly suffer harm if he
has a preference for OEM parts. 14 Second, a low-price, low-quality replacement part
may be purchased on the mistaken belief that this part is equal in quality to OEM
replacement parts. Obviously, such a consumer will not receive the expected benefits
f rom the purchase.
It 	is 	unclear 	whether 	a 	lack 	of 	consumer 	information 	has 	created 	any
substantial competitive problems in 	the crash parts market. 	If it has, however,
notifying customers that non-OEM parts are now commonly used by repair shops,
13 The 	degree 	to 	which 	quality 	variations 	exist 	is 	controversial. 	Ford, 	for
example, maintains that 'lw]e have yet to find a substitute sheet metal part that
comes close to meeting Ford specifications, whether it be in fit and finish or in
corrosion protection. See Public Affairs, Ford Parts and Service Division, Motorists 'Cheated'
with Substandard Substitute Sheet Metal, at 1 (undated). Non-OEM manufacturers contend
that, on the average, their crash parts are equal in quality to OEM parts. 	A 1986
survey of Taiwanese manufacturing facilities conducted by State Farm Insurance
inspectors found that the majority of surveyed plants produced crash parts that met
or exceeded the quality of OEM parts. 	See Foreign Aftermarket Parts and the Quality
Question, J. AM. INS. 6, 8 (2d Qtr. 1987~
14 If a consumer unwittingly purchases a non-OEM part that is inferior to an
OEM part, this would also injure the reputation of the OEM. 	Over time, this loss
of reputation would hurt consumers as well as the OEM. 	A false perception that
the OEM's parts are of poor quality would reduce the price that consumers would
pay for OEM parts. 	This, in turn, would reduce the OEM's incentive to incur the
higher costs of high quality production. 	Eventually, fewer high quality goods would
be offered, contrary to consumers' preferences. 	See M. Lynch, et al., 	Experimental
Studies of Markets with Buyers Ignorant of Quality Before Purchase: When Do "Lemons" Drive
Out High Quality Products?, Bureau of Economics Staff Report to the Federal Trade
Commission, (l986~

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 8.
and that these parts may differ in quality from OEM parts, could provide consumers
with useful information. The disclosure provisions in H.B. 302 might improve market
performance if (1) there are significant quality differences between OEM. and non-
OEM 	parts, 	(2) 	the 	market 	fails 	to 	provide 	information 	about 	such 	quality
differences, and (3) the costs of mandated disclosure do not offset the corresponding
benefits.15
The existence of quality differences does not, by itself, necessitate the use of
mandated information disclosures, since producers may have both the incentive and
the ability to provide consumers with adequate information. 	Producers of high-
quality 	parts, whether OEM or non-OEM, 	have substantial 	incentives 	to assure
consumers that they will deliver the promised quality; otherwise, consumers will not
be 	willing 	to 	pay 	a 	price 	that 	will 	cover 	the 	increased 	costs of 	higher 	quality
production. 	Whether 	an 	unregulated 	market 	will generate 	enough 	information
depends 	upon 	whether 	firms 	have 	ways 	of 	credibly 	conveying 	information 	to
consumers.
OEMs appear to be making serious efforts to differentiate their crash products
from 	those 	of 	their 	non-OEM 	competitors. 	General 	Motors 	and 	Ford 	have
apparently engaged in aggressive campaigns to emphasize alleged quality differences.
The "Mr. Goodwrench"f'Genuine GM Parts" campaign is particularly prominent. 	In
these advertisements, consumers are told that non-OEM parts are inferior and are
exhorted to demand "genuine" GM parts. 16
Similarly, non-OEM producers are apparently adopting measures to convey
information 	about 	quality 	to 	consumers. 	In 1985, the 	Aftermarket 	Body 	Parts
Association ("ABPA"), composed of non-OEM parts suppliers, recommended that its
15 See generally International Harvester Co., 104 F.T.C. 949 (1984~
16 A "Parts & 	Accessories 'Information' Bulletin" relating to "Imitation Sheet
Metal" announced to "All General Motors Dealers":
Beginning May 19th, General 	Motors Parts will air 	the
attached radio spot for three successive weeks. 	A total of
461 national spots will air, with additional spots in select
markets. 	Over 3,000 radio stations nationwide will air this
spot during prime, drive-time hours; over 352,000,000 ~ross
impressions will be made! 	... 	What better way to tell the
public about the "critical difference" between genuine and
imitation parts. And the importance of asking for genuine
GM Parts. 	(Emphasis in original.)
S. M. McAllister, Director, Marketing and Forward Planning, General Motors Parts,
National Radio Campaign; Imitation Sheet Metal (May 9, 1986~

The Honorable Joseph E. Haines
House of Representatives, State of Ohio 	Page 9.
members offer a five-year limited warranty on crash parts.!' 	A majority of ABPA
members have followed this recommendation.18 The ABPA also has developed a
certification program which specifies tolerances and characteristics of crash parts
sold by participating manufacturers. 19
Thus, there appear to exist means by which crash part manufacturers can
credibly convey truthful information about their product quality. 	The presence or
absence 	of 	features 	such 	as 	voluntary 	certification 	and 	warranties 	provides
consumers 	with 	information 	that 	helps 	them 	to 	distinguish 	between 	producers
offering different levels of quality.
The General 	Assembly 	may 	wish to consider 	the full 	implications of 	the
certification and warranty programs established by the ABPA and other similar
organizations. 	The General Assembly also may wish independently to investigate
the 	procedures 	underlying such certification 	programs and 	the 	extent 	to 	which
organizations such 	as 	ABPA 	are effective 	in setting 	warranty 	and certification
standards for their members.
The final consideration is whether the benefits to consumers of mandatory
disclosure outweigh the corresponding costs. 	There are two types of costs generally
associated with mandatory disclosure. 	First, there are the direct resource costs of
conveying the mandated information to consumers, which may exceed the costs of
voluntarily-supplied consumer information. 	Second, there is a risk that the language
of 	a 	mandatory 	disclosure 	may 	mislead 	consumers, 	creating 	a 	negative 	public
perception when none is justified 	This can occur even if the information disclosed
is truthfu1.2O
17 ABPA 	Background at 4 (undated); Letter 	from 	Stanley 	Rodman 	to 	Peter
Jennings (June 23, 1988) (located at 1-2).
18 Rodman, supra note 17, at 1
19 The ABPA recently established the Certified Automotive Parts Association
("CAPA tl ) to review and direct the testing by Detroit Testing Laboratories (tlDTL tl )
of 	crash 	parts. 	ABPA, 	Aftermarket 	Parts 	Testing 	and 	Certification 	Program
(undated). 	The November 1989 Parts Directory listed (fJ7 certified non-OEM crash
parts, a 500% increase in the number of parts listed as available in 1987. 	Certified
Automotive Parts Association, Directory of Certified Aftermarket Body Parts at 2 (1989).
20 For example, the disclosure statement requires that the repairer state that
part failures attributable to the use of non-OEM 	parts may not 	be covered tlby
guarantees provided by the repair facility or installer." While this is a true statement,
it is unclear whether repair facilities or installers currently tend to offer OEM and
non-OEM customers different warranty terms. 	If they do not, this statement may
(continued_)

The Honorable Joseph E. Haines
House of Representatives. State of Ohio
v. 	CONCLUSION.
Page 10.
.~ ( .\ '--	• I ~ I t
In considering House Bill 302, FTC staff suggest that the Legislature take
into account the possibility that the Bill might unreasonably restrict consumer choice
in the market for auto crash parts. 	The Legislature may also wish to take into
consideration the benefits and costs of mandatory disclosure.
Sincerely,
-~"'.../
V 	Mark D. Kindt
Director
Cleveland Regional Office
.'-
Marcy J. K. Tiffany
Director
Los Angeles Regional Office
2O(_continued)
cause 	some 	consumers 	to 	infer 	incorrectly 	that 	such 	differences 	are 	relatively
common. 	Also, the failure of the disclosure statement to convey information about
manufacturers' warranties may also mislead consumers.