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
Objectives and Key Themes
This paper aims to analyze the oligopolistic behavior of the U.S. automobile industry, focusing on General Motors, Ford, and Chrysler. It examines how prices are determined within this oligopoly, comparing it to a perfectly competitive market. The paper also investigates the absence of a Bertrand-Nash equilibrium and the mechanisms used to punish cartel members who deviate from agreed-upon pricing strategies. Finally, it explores the decision-making process behind the introduction of new car models.
- Price leadership and pricing strategies in the U.S. automobile oligopoly.
- Comparison of oligopolistic pricing with perfectly competitive pricing and its impact on welfare.
- Analysis of the absence of a Bertrand-Nash equilibrium in a collusive oligopoly.
- Enforcement mechanisms within the cartel to prevent price cheating.
- Decision-making processes concerning new product introductions in the context of game theory.
Chapter Summaries
1. Introduction: This introductory chapter sets the stage by establishing the U.S. automobile industry as a prime example of an oligopoly, dominated by General Motors, Ford, and Chrysler. It highlights the industry's influence on pricing and new car model development, mentioning existing research on collusive behavior. The chapter outlines the paper's objectives: identifying the price leader, explaining price determination mechanisms, comparing welfare outcomes with perfect competition, analyzing the absence of a Bertrand-Nash equilibrium, exploring cartel punishment strategies, and examining new product introduction decisions through the lens of game theory.
2. The Price Leader in the Oligopoly: This chapter identifies General Motors as the price leader in the U.S. automobile oligopoly, based on evidence from pricing decisions between 1965 and 1971 (Boyle & Hogarty, 1975). The analysis focuses on the dynamic interplay between General Motors, Chrysler, and (implicitly) Ford. Chrysler's initial price increases are followed by smaller increases from General Motors, prompting Chrysler to adjust its prices to align with General Motors', indicating General Motors' leadership role in setting prices. The chapter suggests Ford follows General Motors' pricing strategy, acting as a price follower.
3. How Prices are determined: This chapter contrasts price determination in perfect competition with that in the oligopolistic automobile market. In perfect competition, firms maximize profit by equating marginal cost with market price, leading to zero economic profit. However, the automobile oligopoly, acting as a single monopolist (Bresnahan, 1987), jointly sets prices to maximize collective profit, resulting in prices significantly above marginal costs. This collusive pricing behavior is explored in depth, showcasing a deviation from the perfectly competitive model.
3.1. Influences on the Surpluses and Welfare: This sub-chapter directly examines the welfare consequences of the collusive pricing strategy. The analysis reveals a decrease in total welfare and consumer surplus due to the higher prices. Conversely, producer surplus increases because of the mark-up on prices. Quantitative figures are presented, indicating an annual producer surplus of $4 billion and a consumer loss of $7 billion, resulting in an overall welfare loss exceeding $3 billion per year (Bresnahan, 1981). This highlights the efficiency loss associated with the oligopoly's pricing behavior.
4. Absence of a Bertrand-Nash Equilibrium: This chapter explains the absence of a Bertrand-Nash equilibrium in the collusive oligopoly. It emphasizes that price is not a strategic variable in this context, unlike in the Bertrand model where firms compete on price (Bresnahan, 1987). Instead, the agreed-upon price allows all three firms to achieve higher profits than they would under price competition, eliminating the conditions for a Bertrand-Nash equilibrium. The chapter strengthens the argument for the collusive nature of the market.
5. Punishment in the Cartel: This chapter analyzes the punishment mechanisms used to enforce the cartel's price agreements. The actions of Ford and General Motors against Chrysler's price cheating illustrate these mechanisms (Boyle & Hogarty, 1975). Chrysler's initial discounts led to a significant shift in market share, prompting Ford and General Motors to engage in a price war targeting Chrysler's key markets. This punitive action effectively restored market equilibrium and demonstrated the consequences of deviating from the collusive pricing strategy. This serves as a strong example of enforcement within the cartel.
6. Product Introduction: This chapter, while not fully detailed, indicates an upcoming discussion of new product introductions within the oligopoly context. The planned application of game theory to analyze these decisions suggests a focus on strategic interactions and the impact of new models on market dynamics and competitive behavior.
Keywords
Oligopoly, U.S. automobile industry, price leadership, price determination, Bertrand-Nash equilibrium, cartel, collusive behavior, price cheating, punishment, welfare, consumer surplus, producer surplus, game theory, product introduction.
Frequently Asked Questions: Analysis of the U.S. Automobile Oligopoly
What is the main focus of this paper?
This paper analyzes the oligopolistic behavior of the U.S. automobile industry, specifically focusing on General Motors, Ford, and Chrysler. It examines how prices are determined, compares this to a perfectly competitive market, investigates the absence of a Bertrand-Nash equilibrium, explores cartel punishment mechanisms, and analyzes new product introduction decision-making.
Who is identified as the price leader in the U.S. automobile oligopoly?
General Motors is identified as the price leader, based on evidence from pricing decisions between 1965 and 1971. Chrysler's price increases are followed by smaller increases from General Motors, prompting Chrysler to adjust, indicating General Motors' leading role. Ford is suggested to be a price follower.
How does price determination in the oligopoly differ from perfect competition?
In perfect competition, firms equate marginal cost with market price, resulting in zero economic profit. The automobile oligopoly, acting as a single monopolist, jointly sets prices to maximize collective profit, leading to prices significantly above marginal costs. This contrasts sharply with the perfectly competitive model.
What is the impact of the oligopolistic pricing strategy on welfare?
The collusive pricing strategy decreases total welfare and consumer surplus due to higher prices. Producer surplus increases because of the price mark-up. Quantitative figures suggest an annual producer surplus of $4 billion and a consumer loss of $7 billion, resulting in an overall welfare loss exceeding $3 billion per year.
Why is there an absence of a Bertrand-Nash equilibrium in this oligopoly?
The absence of a Bertrand-Nash equilibrium is due to the collusive nature of the oligopoly. Price isn't a strategic variable; the agreed-upon price allows all three firms higher profits than under price competition, eliminating the conditions for a Bertrand-Nash equilibrium.
What punishment mechanisms are used to enforce cartel agreements?
Punishment mechanisms involve actions taken against firms that deviate from agreed-upon prices. Chrysler's price discounts led to a price war initiated by Ford and General Motors, targeting Chrysler's key markets. This restored market equilibrium and demonstrated the consequences of price cheating.
What is the planned discussion regarding product introduction?
The paper plans to discuss new product introductions within the oligopoly context, using game theory to analyze strategic interactions and the impact of new models on market dynamics and competitive behavior.
What are the key themes explored in this paper?
Key themes include price leadership and pricing strategies, comparison of oligopolistic and perfectly competitive pricing, the absence of a Bertrand-Nash equilibrium, cartel enforcement mechanisms, and decision-making processes concerning new product introductions using game theory.
What are the key words associated with this research?
Key words include Oligopoly, U.S. automobile industry, price leadership, price determination, Bertrand-Nash equilibrium, cartel, collusive behavior, price cheating, punishment, welfare, consumer surplus, producer surplus, game theory, and product introduction.
- 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
