The US automobile industry is a good example of an oligopoly. It consists mainly of three major firms, General Motors (GM), Ford, and Chrysler. The influence of this oligopoly can be seen in the prices and the development and introduction of new car models into the American car market. Extensive work has been done on the field of collusive behaviour in the US automobile market and moreover the introduction of the small car in the 1950s shows how the firms collude when it comes to the introduction of a new car.
Table of contents
1. Introduction
2. The Price Leader in the Oligopoly
3. How Prices are determined
3.1. Influences on the Surpluses and Welfare
4. Absence of the Bertrand-Nash Equilibrium
5. Punishment in the Cartel
6. Product Introduction
6.1. Applied Game Theory
7. Conclusion
Objectives and Topics
This paper examines the dynamics of the U.S. automobile industry, focusing on how an oligopolistic structure—dominated by General Motors, Ford, and Chrysler—influences pricing strategies and product development. It explores the mechanisms of collusive behavior, the role of price leadership, and the strategic rationale behind product release timing.
- Analysis of price leadership dynamics between General Motors, Ford, and Chrysler.
- Economic impact of collusive pricing on consumer welfare and market efficiency.
- Mechanisms for enforcing discipline within a cartel against price undercutting.
- Application of game theory to explain the delayed introduction of new vehicle models.
Excerpt from the book
6. Product Introduction
Finally the product development behaviour of the cartel will be analysed. In this topic there has been done a extensive work by White (1977). This work shows that special procedures take place before a new car is to be introduced. The underlying thinking of the big three companies during introducing a new car is this, they do not introduce a new car, when they think that this will cut the profits of their more profitable cars. In White’s (1977) work it was the introduction of the small car. The companies knew that there was a change in costumer demand for small car but they were reluctant to introduce that car. There are two reasons for this, first, as already mentioned, it is the fear of smaller profits of the more profitable big cars. The second reason is that the oligopoly was so collusive that they agreed to wait until there was “room-for-all”(White, 1977) in the market. Room-for-all means that the oligopolists wait on to that point where the market, in this example the market for small cars, is big enough that when all three oligopolists enter that market, they would all generate sufficient profits. This is identical with the theory of Asplund and Sandin (1999), which says that in an oligopoly the number of firms positively correlates with market size. The target size for the small car market was for example the demand 500000 units, until that point no company would see sufficient profits in the market that would make it enter (White, 1977). It is not that the companies did not have any small car models that they could produce immediately. Ford, General Motors and Chrysler all knew how to build small cars and had the production possibilities of those cars more or less ready (White, 1977).
Summary of Chapters
1. Introduction: Outlines the oligopolistic structure of the U.S. automobile industry and sets the research focus on price leadership, collusion, and product strategy.
2. The Price Leader in the Oligopoly: Demonstrates that General Motors historically acted as the price leader, with Ford and Chrysler typically following its pricing adjustments.
3. How Prices are determined: Examines how the "Big Three" avoid competitive pressure by pricing jointly to maximize collective profits rather than individual gains.
3.1. Influences on the Surpluses and Welfare: Details the economic consequences of collusive pricing, specifically the significant loss in consumer welfare and total market efficiency.
4. Absence of the Bertrand-Nash Equilibrium: Explains why traditional competitive models fail, as collusive firms do not treat price as an independent strategic variable.
5. Punishment in the Cartel: Describes the punitive measures taken against firms that deviate from agreed-upon prices, using historical price wars as evidence.
6. Product Introduction: Analyzes the reluctance of firms to launch new products that might cannibalize the profits of existing, more lucrative vehicle lines.
6.1. Applied Game Theory: Frames the timing of product introductions as a prisoner's dilemma, where firms wait for sufficient market size to ensure collective profitability.
7. Conclusion: Summarizes that the U.S. auto industry's collusive nature results in sub-optimal welfare outcomes and rigid product development cycles.
Keywords
Oligopoly, Automobile Industry, Collusion, Price Leadership, Cartel, Bertrand-Nash Equilibrium, Consumer Welfare, Producer Surplus, Game Theory, Prisoner’s Dilemma, Market Efficiency, Product Development, Small Car, Market Share, Price War.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines how the oligopolistic structure of the U.S. automobile industry, consisting of General Motors, Ford, and Chrysler, influences market pricing and the strategic timing of new product introductions.
What are the central thematic areas?
The central themes include collusive pricing behavior, price leadership dynamics, the economic impact on welfare and consumer surplus, cartel enforcement mechanisms, and the application of game theory to strategic corporate decision-making.
What is the main research question or objective?
The objective is to analyze why the U.S. automobile market displays non-competitive behavior, specifically identifying the price leader, explaining the lack of a Bertrand-Nash equilibrium, and understanding the logic behind delayed product innovations.
Which scientific methods are utilized?
The study employs a qualitative analysis of historical industrial economic theory and empirical literature, utilizing game theory frameworks to interpret the strategic interactions between the three major firms.
What topics are covered in the main body?
The main body covers the identification of price leadership between 1965 and 1971, the comparison of collusive pricing versus perfect competition, the mechanisms for punishing price cheaters, and the "prisoner's dilemma" related to the introduction of small cars.
Which keywords characterize this work?
Key terms include oligopoly, collusion, price leadership, game theory, consumer welfare, and cartel behavior.
How do the firms in the cartel handle price undercutting by a member?
The cartel employs a punishment mechanism where other members aggressively undercut prices in the cheater's primary market segment, causing significant losses until the cheating firm returns to the agreed-upon price.
Why did the "Big Three" delay the introduction of small cars?
The firms feared that introducing small cars would reduce the profits of their larger, more lucrative models, and they collectively waited for the market size to reach a threshold ("room-for-all") that ensured sufficient profits for all participants.
What is the significance of the term "room-for-all"?
It refers to the strategic threshold in market demand (e.g., 500,000 units) at which all three oligopolists could enter a new product segment simultaneously while still maintaining collective profitability.
- Quote paper
- Ricardo Falter (Author), 2010, The effects of oligopoly in the US Automobile sector on pricing and development, Munich, GRIN Verlag, https://www.grin.com/document/175388
