The Impact of Imports on Price Competition in the Automobile Industry

Ramrattan, Lall B., American Economist

Price Competition in the Automobile Industry

Traditionally, U. S. automobile firms followed a stable policy in pricing cars. General Motors sets its prices based on a target return on its investments, and other firms imitate its price. According to Donaldson Brown (1924), General Motors estimated sales, cost of unit sold, and added a 15 to 20 percent rate of return to determine its price.

During the 1960's, the price differences between Ford Motor Company and General Motors were only $10 to $20; between Chrysler Corporation and Ford Motor Company, only $40 to $50 (Scherer, 1980, p. 181). In the subcompact category, General Motor's Chevette and Ford's Pinto prices differed by only $11 to $73. For the 1957-1971 period, Boyle and Hogarty (1975) found that the U.S. firms colluded in their price behavior in a hedonic way.

In the 1970's and 1980's, U. S. auto firms adopted several newer pricing policies in response to high oil prices, inflation, interest rates, and frequent recessions. According to R. L. Polk's data (1988, p. 32), the share of imports climbed from 14.53 percent in 1972, to 32.09 percent in 1987. The increase was steady between 1978-1982, and between 1982-1987. Domestic firms retaliated by making smaller cars, cutting wages, closing plants, improving efficiency, and adopting measures to reduce government regulations. Dealer's discount and customer's rebate were widespread. Chevrolet, Ford Motor Company and American Motors practiced a "Two-tier" pricing policy, charging lower prices for subcompacts in the western states where import competition was strongest. General Motors started "interim pricing" --a smaller than usual price increases at the beginning of the model year followed by more frequent increases later. Firms also tried basing price increases on "product improvement" only. Chrysler Corporation did not follow the leader's policies frequently. In one instance, it priced subcompacts in direct retaliation to prices of imports.

The purpose of this paper is to assess whether the increased foreign competition in the 70's and 80's has affected the price behavior of U. S. automobile firms. We used a hedonic price model developed by Boyle and Hogarty (1975) to explain price-collusive behavior among domestic firms for the period 1972-1987. For years in which the traditional price policy was not maintained, we isolated the cheater, and offered explanations for why the hypothesis may have failed. Finally, as it was argued that the U. S. and Japan …

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Publication information: Article title: The Impact of Imports on Price Competition in the Automobile Industry. Contributors: Ramrattan, Lall B. - Author. Journal title: American Economist. Volume: 35. Issue: 2 Publication date: Fall 1991. Page number: 60+. © 1999 Omicron Delta Epsilon. COPYRIGHT 1991 Gale Group.

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