FTC Staff Comment to the Hon. John L. OBrien Concerning Washington H.B. H-2212 to Define Standards for the Certification of Aftermarket Crash Part Quality

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COMMjSSJUN AUTHORiZED
February 	26, 	1990
The 	Honorable 	John 	L. 	O'Brien
Speaker 	Pro 	Tempore
House 	of 	Representatives, 	state 	of 	Washington
Joseph 	Vance 	Building
Seattle, 	Washington 	98101
Dear 	Representative 	o'Brien:
The 	staff 	of 	the 	Federal 	Trade 	Commission' 	is 	pleased 	to
respond 	to 	your 	invitation 	for 	comments 	on 	House 	Bill 	H-2212,
which 	defines 	standards 	for 	the 	certification 	of 	"aftermarket
crash 	part" 	quality, 	and 	which 	mandates 	the 	disclosure 	of 	certain
information 	to 	consumers. 	We 	suggest 	that 	the 	General 	Assembly
balance 	the 	possible 	costs 	of 	mandated 	disclosure 	and
certification 	~tandards against 	their 	perceived 	benefits.
I. 	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. 2 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 	competitiv~ and 	consumer welfare 	implications 	of
pending 	policy 	issues. 	'
In 	the 	course 	of 	its 	law 	enforcement 	activities, 	Commission
staff 	has 	become 	familiar 	with 	the 	issues 	relating 	to 	competition
in 	the 	market 	for 	crash 	parts. 	In 	particular, 	in 	General 	Motors
corp.3 	the 	staff 	investigated 	the 	effe6ts 	cif 	General 	Motors'
crash 	parts 	distribution 	system 	on 	independent 	wholesalers, 	body
, 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Los
Angeles 	Regional 	Office 	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 	~
3 99 	F.T.C. 	554 	(1982).

shops, 	and 	others. 	In 	addition, 	the 	staff 	has 	recently 	provided
comments 	on 	proposed 	Ohio 	legislation 	to 	regulate 	the 	sale 	of
aftermarket 	crash 	parts. 4
More 	generally, 	the 	staff 	has 	frequently 	annlyzed 	the
effectiveness 	of 	advertising 	and 	labeling 	in 	providing 	consumers
with 	reliable 	product 	information,5 	and 	has 	examined 	the 	need 	for
disclosure 	statements 	and 	performance 	standards 	in 	situations
where 	the 	unregulated market may 	fail 	to 	provide 	adequate
information. 6
II. 	DESCRIPTION OF H-2212
H-2212 	(the 	"Bill") 	regulates 	the 	marketing 	and 	use 	of
aftermarket 	crash 	parts. 	Aftermarket 	crash 	parts 	are 	exterior
sheet 	metal 	or 	plastic 	replacement 	parts 	for 	automotive 	vehicles,
generally 	replaced 	as 	the 	result 	of 	a 	collision. 	Although 	both
original 	and 	non-original 	equipment 	manufacturers 	produce 	crash
parts, 	Sections 	3 	and 	5(3) 	of 	the 	Bill 	specifically 	refer 	to
"aftermarket 	crash 	parts" 	as 	those 	not 	produced 	or 	supplied 	by
the 	original 	equipment 	manufacturer 	("OEM") .
. The 	Bill 	contains 	three 	major 	provisions. 	First, 	"unless
[the 	consumer] 	agrees 	to 	accept 	noncertified 	parts," 	all
aftermarket 	crash 	parts 	used 	to 	prepare 	estimates 	must 	be
certified 	as 	meeting 	certain 	specifications 	as 	to 	~inish,
function, 	and 	corrosion 	resistance. 	Under 	Sections 	4(2) 	and
4 	Letter 	from 	Mark 	D. 	Kindt, 	Director, 	Cleveland 	Regional
Office, 	and 	Marcy 	J. 	K. 	Tiffany, 	Director, 	Los 	Angeles 	Regional
Office, 	to 	the 	Honorable 	Joseph 	E. 	Haines, 	Ohio 	House 	of
Representatives 	(December 	18, 	1989).
5 Working 	papers 	and 	reports 	published 	by 	staff members 	in
the 	Bureaus 	of 	Economics 	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); 	J. 	Lacko, 	Product
Quality 	and 	Information 	in 	the 	Used 	Car Market, 	(1986).	..... . 	- -.,
6 Although 	none 	of 	these 	studies 	specifically 	address 	the
automotive 	crash 	parts 	market, 	the 	basic 	principles 	discussed 	are
highly 	relevant 	to 	assessing 	the 	need 	for 	government mandated
quality 	standards 	and 	information 	disclosures 	in 	all 	markets.
See, 	~, 	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); 	J. 	Hilke, 	Minimum Quality Versus 	Disclosure
Regulations: 	State 	Regulation 	of 	Interstate 	Opened-Ended
Investment 	Company 	and 	Common Stock 	Issues 	(1987).
2

5(5), 	"certification" 	indicates 	that 	the 	non-OEM 	part 	is 	"at
least 	the 	same 	quality 	with 	respect 	to 	fit, 	finish, 	function, 	and
corrosion 	resistance" 	as 	the 	OEM 	part 	being 	replaced.? 	Second,
repairers 	are 	prohibited 	from 	using 	noncertified 	crash 	parts
without 	the 	customer's 	written 	consent. 	Third,1 even 	when
repairers 	use 	certified 	crash 	parts, 	they 	must 	disclose 	to
consumers 	that 	they 	are 	non-OEM 	parts, 	and 	that 	they 	will
invalidate 	any 	remaining OEM warranties 	on 	those 	parts. 8
III. 	THE 	COMPETITIVE 	EFFECTS 	OF H-2212
The 	apparent 	purpose 	of 	H-2212 	is 	to 	protect 	uninformed
consumers 	from 	having 	allegedly 	low-quality, 	non-OEM 	replacement
parts 	installed 	in 	their 	automobiles. 	The 	Bill 	attempts 	to
provide 	this 	protection 	through 	mandatory 	disclosure 	and
certification 	requirements.
In 	some 	situations, 	mandatory 	disclosures 	by 	themselves
might 	be 	insufficient 	to 	solve 	the 	problems 	stemming 	from
inadequate 	consumer 	information. 	For 	example, 	when 	it 	is 	costly.--
for 	consumers 	to 	assimilate 	and 	act 	on 	the 	information 	contained
in 	a 	disclosure, 	performance 	standards 	(and 	an 	accompanying
certification 	procedure) 	can, 	under 	some 	circumstances, 	benefit
consumers 	by 	providing 	useful 	information 	about 	quality 	in 	a 	form
that 	most 	consumers 	can 	readily 	understand. 	The 	Bill 	attempts 	to
do 	this 	by 	articulating 	performance 	standards 	that 	a 	crash 	part
must 	satisfy 	if 	it 	is 	to 	be 	marketed 	to 	consumers 	as 	a
"certified" 	part.
Whether 	there 	now 	exists 	substantial 	quality 	or 	price
variation 	between 	OEM 	and 	non-OEM 	parts 	is 	a 	factual 	question
that 	we 	do 	not 	address 	here. 	However, 	as 	we 	discuss 	below,
informed 	consumers 	might 	prefer a 	lower 	quality 	part 	if 	its 	price
is 	also 	lower. 	In 	this 	section, 	we 	describe 	the 	analytical
framework 	used 	by 	the 	Commission 	in 	determining 	whether
affirmative 	disclosure 	should be 	required 	in 	any 	given 	case.
7 Under 	sections 	4(2) 	and 	5(5), 	"certified" 	means 	that 	the
part 	has 	been 	approved 	by 	an 	independent. testing 	agency 	that
scientifically 	analyzes 	the 	part. 	section 5 	of 	the 	Bill 	does 	not
require 	OEM 	parts 	to 	be 	certified; 	rather, 	OEM manufacturers 	are
only 	obligated 	to 	provide 	a 	warranty 	on 	the 	crash 	part 	equal 	to
that 	offered 	on 	the 	original 	part. 	Forcing makers 	of 	non-OEM
parts 	to 	incur 	costs 	not 	incurred 	by OEM manufacturer 	could 	place
the 	former 	at 	a 	competitive 	disadvantage.
8 	Insurers 	are 	prohibited 	from 	requiring 	the 	use 	of
noncertified 	aftermarket 	crash 	parts 	unless 	they 	obtain 	the
written 	consent 	of 	the 	registered 	owner 	or 	his 	or 	her
representative. 	We 	do 	not 	comment 	on 	this 	aspect 	of 	the 	BillA
3

A. 	TRADEOFFS 	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 	quali~ 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
informed 	choices 	reflecting 	their preferences 	for 	quality 	and
price.
It 	is 	likely, 	however, 	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 	consumers 	cannot
evaluate 	quality, 	producers 	may 	provide 	lower 	quality 	products
than 	consumers 	desire.
B. 	THE 	ANALYTICAL 	FRAMEWORK: 	MANDATED 	DISCLOSURE
Under 	such 	circumstances, 	there 	are 	a 	number 	of 	policy
measures 	that 	might 	better 	enable 	consumers 	to 	make 	informed
purchases. 	One 	possibility 	is 	to 	simply mandate 	the 	disclosure
of 	relevant 	information. 	In 	the 	current 	setting, 	notifying
customers 	that 	non-OEM parts 	are 	now commonly used 	by 	repair
shops, 	and 	that 	these 	parts 	may 	differ 	in 	quality 	from 	OEM 	parts,
might 	provide 	consumers 	with 	sufficient 	information 	to 	permit
them 	to 	make 	appropriate 	product 	selections. 	Such 	a 	disclosure
might 	improve market 	performance 	if 	(1) 	there 	are 	significant
quality 	differences 	between OEM 	and 	non-OEM 	parts, 	(2) 	the 	market
currently 	fails 	to 	provide 	information 	about 	such 	quality
differences, 	and 	(3) 	the 	costs 	of mandated 	disclosure do 	not
offset 	the 	corresponding 	benefits. 9 	' .
9 See 	generally 	International 	Harvester 	Co., 	104 	F.T.C. 	949
(1984) •
4

C. 	THE 	COSTS 	OF MANDATORY 	DISCLOSURE 	AND 	CERTIFICATION
REQUIREMENTS
As 	indicated 	above, 	we 	have 	not 	attempted 	to 	determine
whether 	significant 	quality 	differences 	exist 	between 	QEM 	and
non-OEM 	parts. 	However, 	the 	existence 	of 	quality 	differences
would 	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 	about
quality 	differences. 	Producers 	of 	high-quality 	parts, 	whether
QEM 	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 	can 	credibly 	convey 	information 	to 	consumers; 	e.g., 	can 	a
high 	quality 	firm 	make 	truthful 	statements 	about 	its 	quality 	that
even 	a 	skeptical 	consumer 	will 	believe?
Whether mandatory 	disclosure 	of 	information 	is 	a 	useful
policy 	instrument 	ultimately 	depends 	upon 	whether 	its 	benefits 	to
consumers 	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 	expressed 	information
disclosed 	is 	truthful.
When 	effective 	private mechanisms 	for 	the 	transmission 	of
information 	that 	consumers 	value 	already 	are 	in 	place, 	the
additional 	benefit 	of 	statutorily-imposed disclosures 	and
certification 	standards 	may 	be 	quite 	limited, 	and 	such a 	program
may 	therefore 	impose 	costs 	that 	are 	greater 	than 	its 	benefits.
It 	appears 	that 	both 	OEM 10 and 	non-OEM 	firms 	are 	already 	adopting
10 	OEMs 	appear 	to 	be 	making 	serious 	efforts 	to 	differentiate
their 	crash 	products 	from 	those 	of 	thei~,non-OEM·competitors.
General 	Motors 	and 	Ford have 	apparently'engaged 	in 	aggressive
campaigns 	to 	emphasize 	alleged 	quality 	differences. 	The 	"Mr.
Goodwrench"/"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. 	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
5

such mechanisms. 	For 	example, 	in 	1985 	the 	Aftermarket 	Body 	Parts
Association 	("ABPA"), 	composed 	of 	non-OEM 	parts 	suppliers,
recommended 	that 	its 	members 	offer 	a 	five-year 	limited warranty
on 	crash 	parts." 	A majority 	of ABPA members 	have 	reportedly
followed 	this 	recommendation. 12 The ABPA 	also 	hqs 	developed 	a
certification program which 	specifies 	tolerances 	and
characteristics 	of 	crash 	parts 	sold 	by 	participating
manufacturers. 13
The 	Legislature may wish 	to 	consider the 	full 	implications
of 	the 	certification 	and 	warranty 	programs 	established 	by 	the
ABPA 	and 	other 	similar 	organizations. 	The 	Legislature 	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. 	We 	suggest 	that 	the 	Legislature
consider whether 	the 	Bill 	offers 	consumers 	additional 	significant
benefits 	in view 	of 	the 	existence 	of 	these 	certifying
institutions 	and 	warranty 	programs.
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 	gross 	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).
11 ABPA 	Background at 	4 	(undated); 	Letter 	from 	Stanley
Rodman 	to 	Peter Jennings 	(June 	23, 	1988) 	(located 	at 	1-2).
,'/..
12 Rodman, 	supra 	note 	11, 	at 	1-
13 The 	ABPA 	recently 	established 	the 	certified Automotive
Parts 	Association 	("CAPA") 	to 	review and 	direct 	the 	testing 	by
Detroit 	Testing 	Laboratories 	("DTL") 	of 	crash 	parts. 	ABPA,
Aftermarket 	Parts 	Testing 	and 	certification 	Program 	(undated).
The 	November 	1989 	Parts 	Directory 	listed 	607 	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).
6

IV. 	CONCLUSION
In 	considering 	House 	Bill 	H-2212, 	FTC 	staff 	suggest 	that 	the
Legislature 	inquire 	whether 	the 	producers 	of 	cr~sh parts 	are
adopting 	measures 	that 	will 	convey 	to 	consumers 	truthful,
nondeceptive 	information 	on 	quality 	and 	on 	the 	impact 	of 	crash
part 	use 	on 	existing 	automotive 	warranties. 	The 	Legislature 	may
then 	wish 	to 	use 	the 	information 	obtained 	from 	such 	an 	inquiry 	to
assess 	whether 	the 	benefits 	of 	mandated 	information 	disclosures
and 	certification 	standards 	outweigh 	the 	corresponding 	costs.
Sincerely,
Regional 	Office
7