The economics of the automotive repair trade

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Question: 

I apologize, as this will seem to be a very vague question. I don't know that it is so very vague, as it is nuanced and not so easily answered without a tremendous amount of effort and time information gathering.

I'm very curious what an economist thinks about the automotive repair trade. We aren't really a professional industry as there are no requirements or licenses to become a professional repair technician or work in a professional repair facility. Auto repair has become extremely high tech and sophisticated, in many areas, but also retained many of the same procedures from decades and decades ago with maybe a few changes. So, we have the need for two distinct types of individuals. The thinkers and the doers. Thinkers for the analyzing of systems and data for diagnostic decisions and dealing with technology (computers both on the car and to be used in the shop for scan tools, oscilloscopes, programming, coding, etc.). Doers to take it apart and put it back together efficiently and properly.

Most repair facilities are operated by former technicians. They are not businessmen/women. It is often discussed how, with the commoditization of our services, we are in a race to the bottom by greatly undervaluing ourselves and each other. Many are in this race and unwittingly standing on the gas.

This sounds like a rant and perhaps at some level it is. But I'm seriously interested in the opinions of those that are businessmen/women, who understand economics and game theory (most shops seem to operate on a zero-sum game principle, whether they know it or not).

Automobiles are getting more and more complex, the skill set required to service them is growing and becoming much more difficult to find and retain. Many other industries are looking for the skill sets, or a small fraction of the skill sets that many automotive technicians possess, that have far greater means to compensate for those skill than the auto repair trade currently has; a problem they've created for themselves with the constant undervaluing of their skills, knowledge, and services.

I suppose the easy answer is that it is a total "clusterf^&%" but will either solve itself or crumble altogether, I just wanted to hear what someone that knows what they are talking about thinks, and maybe even entice them to look into it and find out more about our trade.

Answer: 

Auto repair is an example of a "credence good," which is a type of product or service where an expert knows more about the quality the consumers need than the consumers themselves. These kinds of markets can work poorly if consumers are unable to verify if the quality of the service they received was the "right" quality, or that the expert actually provided the promised service. In the case of auto repair, consumers typically worry that they will be recommended unnecessary repairs, or that the repair technician did not actually perform the repairs they said they did.

Over time, this problem can be at least partially solved by reputation. For example, if an auto repair shop prescribes too much repair work, consumers may not learn this immediately, but if they return enough times, they may eventually suspect as much. Or if an auto repair shop doesn't actually perform the repairs it says it will, the car's problems may return. Over time, firms earn reputations and this may force persistently dishonest auto repair firms out of business.

But, as you describe, the industry is currently in a state of change and old reputations may not be a good guide to future work quality. Labor inputs are changing to a mix of high-skilled and low-skilled labor. As you guess, drawing in high-skilled analysts with good outside job options is impossible without offering higher wages. Depending on the exact mix of high- and low-skilled labor, it may be that the cost of repairing cars rises too. If the market is competitive, the price of repairs should rise too.

But with credence goods, an alternative outcome seems possible. Firms could instead try to make do with their existing repair staff, performing sub-optimal repairs and counting on consumer ignorance to let them get away with it. Over time, this strategy should be in trouble, if consumers can detect whether they're getting the right kinds of repairs. But it could take a long time for these new reputations to emerge.

Much depends on whether consumers can easily detect bad repair work. If so, then the market will have to hire high-skilled labor (even if they have to pass the cost of higher wages on to consumers in the form of higher prices). Otherwise, firms will be unable to perform necessary repairs, earn a bad reputation, and stop receiving business. If consumers cannot detect bad repair work easily though, then it may take a long time for the new equilibrium to emerge. If consumers cannot easily see the value they are getting from patronizing firms with more expensive firms, then they may continue to visit firms with the wrong labor mix, at least until they realize they are not getting the right kinds of repair. During this period of learning, it may be difficult for firms offering the right kind of (potentially more expensive) repairs to attract business.

Answered by:
Dr. Matthew Clancy
Assistant Teaching Professor
Last updated on October 14, 2020