Why Don't The Time Prices For Auto Collision Repair Decline?

Services don't enjoy the "economics of knowledge" that products do.

A friend recently asked why the time price of auto-collision repair service keeps going up instead of down. I think there are eight reasons why services generally don’t enjoy the “economies of knowledge” that physical products do:

1. Development Costs and Unit Costs. In manufacturing a physical product, companies spend heavily to develop the first unit but then all subsequent units cost much less. In the case of digital products the unit costs can approach zero. Services don’t enjoy this benefit of knowledge economics because development costs and unit costs are about the same. The second haircut costs the same as the first.

2. Inventory. Imagine if you could build a haircutting factory and then sell haircuts in bulk to barbers. Such a factory would give you the opportunity to divide the labor and specialize, lowering costs, like Adam Smith explained. However, services like haircuts are manufactured on demand, limiting opportunities for such productivity gains. The advantages gained from increasing volume production don't apply to a specialized service since each job is by its nature bespoke; that is, tailored to a specific individual customer.

3. Tools. Many products enjoy gains in productivity because tools are developed to improve the speed of manufacturing and the quality of the product. Most services simply require two human hands. Adding more hands is not going to improve productivity and human hands can only move so fast. Tools remain relatively simple; hammers and hair clippers haven’t changed much in decades. Robot development is mimicking the superb dexterity and sensitivity of the human hand, but it’s still expensive and imperfect. Some services do employ more tools to help, but these costs must be passed on to the customer. A car frame-straightening machine and robot painters can help provide the service, but the customer’s bill will be higher, at least in the short run.

4. Talent. Services that lack prestige or social status struggle to attract workers. When is the last time you recommended to a young person that they become a barber or a plumber? Fewer barbers and plumbers will push prices up, not down. If other jobs are created that are considered more exciting, safer, or financially rewarding the opportunity costs to be a collision repair technician increase, reducing supply. Some services require exceptionally rare combinations of talent and skill. Professional basketball players provide entertainment services and there are few people on the planet that can provide the kind of performance that billions of people will pay to watch. It would be very hard to clone Michael Jordan.

5. Complexity. If the service is repairing a product that is becoming more complex, then the service will require more skill and time. The cost to make a more complex product may fall due to economics of scale, but the cost of servicing that product may go up. My first car was a 1956 Chevy. It was relatively simple to repair with only a few thousand parts. By contrast, modern vehicles contain around 30,000 individual parts. These additional parts make cars safer and more efficient, but more difficult and costly to repair.

6. Uniqueness. Some services must be customized each time they’re provided and so cannot easily be routinized. No two car collisions are exactly alike and each repair requires individual judgment. While experience can help improve the decision-making process, it doesn’t typically speed it up.

7. Danger. When services involve hazardous environments or risky work conditions, the cost typically increases. Auto collision repair technicians, for example, work with chemicals and in environments where injury is a possibility, which drives up costs.

8. National Firms. Unlike McDonald’s or Subway, there are no national chains for collision repair. National firms benefit from sharing knowledge, spreading fixed costs, and offering economies of scale. Local repair shops, by contrast, lack these advantages. Though there are some franchising opportunities in this sector, they’re often focused on brand consistency rather than lowering customer prices.

In summary, it’s unlikely that the cost of services like haircuts and auto collision repairs will decrease significantly in the near future. However, there is one caveat: Elon Musk, Boston Dynamics, and others are on steep learning curves in robotic technology development. Peter Diamandis recently noted that the cost of humanoid robots has been in freefall, plummeting 40 percent in just one year. “Expect Optimus to sell at $20,000 soon. I have no doubts we’ll all be owners of this wondrous machinery not too far from now.” If they can lower their costs and improve dexterity and judgment, we may see the time prices of services decline like those of most physical products.

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Gale Pooley is a Senior Fellow at the Discovery Institute and a board member at Human Progress.