This means that the simple choice of a generic part over an OEM part produced an immediate savings of $40. Testimony in the State Farm case revealed direct savings of about $40 per generic part used. The competition also affected the price of the generic part, which fell 70 percent to just $60.(2) Similar examples abound. By 1996, the price for the Toyota-manufactured part had declined by 43 percent to $143.88. Non-OEM manufacturers began to produce this same part in 1993 for just $202. In 1988, after generic parts began to appear, the same part cost $225-a decline of 31 percent.(1) Likewise, the cost in 1992 for a Toyota-manufactured fender for a new 1992 Toyota Camry was $253. For example, according to Consumer Reports, the cost in 1982 of a nose cover for a 1983 Chevrolet Camaro made by GM was $325. The impact of competition in the parts business is considerable. This recognition led the famous 18th century English economist Adam Smith to declare: “The price of monopoly is upon every occasion the highest which can be got.” Higher prices are the most widely recognized consequence of monopoly. These undesirable consequences of monopoly are the subject of the discussion that follows. Its impacts on producers, consumers and the overall economy are well understood. Fortunately, economists have studied monopoly for centuries. That monopoly prices are higher than competitive prices makes consumers angry, but higher prices are just one of monopoly’s many undesirable effects. They know as well as economists that monopoly is bad news for them. Their visceral response to the concept of monopoly shows an intuitive understanding of economic theory. Most consumers have an instinctive revulsion toward monopoly. The law of supply and demand does not work to the public’s benefit when there is only one supplier. The State Farm case essentially eliminates competition among sellers in the market for crash parts, effectively granting a monopoly to the manufacturers of original equipment parts. This presupposes that there be choices available. Prices for most goods and services in a modern society are determined in competitive markets through the interaction of supply from sellers and demand from buyers. That a local state court would actually act to eliminate competition in an otherwise competitive market, impose its own views on all US consumers, and grant monopoly power to a small number of corporations is not only unprecedented-it is also anathema to the concept of free and fair competition that is at the core of the United States economy. The verdict in favor of the plaintiffs in the State Farm case is allowing automakers to regain the monopoly they exploited in the past when there was no competition in the market for crash parts business. Monopoly: The Impact on the Crash Parts Market Other insurers have suspended their use as well. Although State Farm is appealing, it has discontinued using generic parts. involving the insurer's use of generic parts, an Illinois jury last October found the company liable for $456 million in damages and an additional $730 million in punitive damages, bringing the total awards in the case to $1.19 billion. Many states now require the option of generic parts, sometimes called aftermarket parts.ĭespite the obvious cost advantages associated with the use of generic parts, in a lawsuit against State Farm Mutual Auto Insurance Co. Because most of the independently made parts are lower priced, they have helped to bring down the prices of OEM parts. When independent manufacturers in several countries, including the United States, began making sheet metal replacements, the OEMs found themselves facing some tough competition. Car-makers had a lucrative monopoly, which they have fought to preserve. Original equipment manufacturers (OEM)s had virtually no competition in this market. Prior to 1970, auto body repair shops had to buy replacement parts like fenders, door panels and grills only from auto manufacturers. The repair and replacement of these parts is an important source of revenue for auto body repair shops and the parts manufacturers themselves. Hundreds of thousands of accidents involving damage to these parts occur each year. Generic auto body parts, sometimes referred to as crash parts or cosmetic parts, are sheet metal components such as hoods, fenders and doors, which account for the majority of damage to cars in auto accidents.
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