firmed by relatively small values of the RMS (root-mean-square) simulation error and the mean simulation error presented in Table 14.1.
For simulation beyond the estimation period, we have collected the actual statistics for the exogenous variables in the model for the years 1991 and 1992.
We then calculate Japan's market share under several hypothetical cases about improvements in quality for U.S. domestic cars. In this simulation, the quality index for Japanese cars is assumed to remain at the 1990 level of 4.34. The results of this simulation are presented in Table 14.2.
As shown in that table, the actual market share of Japanese producers was 31.26% in 1991 and 31.82% in 1992. These values are quite close to the simulated Japanese market share values of 32.35% for 1991 and of 31.37% for 1992 which are obtained under the assumption that domestic quality index remains at the 1990 level of 2.49. The table also shows that if the domestic quality index had been higher, Japanese market share would have been substantially lower. The results indicate that relative quality can affect Japan's share in the U.S. market to a very important extent. One implication is that domestic producers could regain significant market shares by improving their quality and reliability.
The market shares of Japan, Volkswagen, General Motors, Ford and Chryler are shown in Figures 14.1-14.5 in the Appendix.
In this chapter, we have suggested that Japan's success in the U.S. automobile market is a result of the convergence of many factors. In the 1960s and 1970s, Japan had a comparative advantage in the production of small cars and it aggressively expanded its exports of small cars. While Japanese producers entered the U.S. market initially as niche players, a window of opportunity was opened for them to become major suppliers when consumer demand shifted to small cars due to the rising inflationary pressure in general and gasoline price in particular.
Empirical evidence in this study supports the hypothesis that gasoline price and quality jointly enabled Japanese producers to expand and maintain their market share in the United States. The increased importance of Japanese products, in turn, has other effects on U.S. automobile demand. Specifically, quality and its perception prolong median age of automobiles in stock, which in turn increases the stock of automobiles measured on per capita basis. Finally, the increase in automobile stock also has a negative effect on the demand for automobiles. While coincidental and complementary developments helped Japanese automobile producers to penetrate the U.S. market, recent evidence indicates that producers in these two countries have entered a new stage of competition. The traditional advantages of Japanese cars in low list prices and fuel economy have disappeared as U.S. producers now produce both large and small cars that are competitive in prices and fuel efficiency. The devaluation of the U.S. Dollars, without doubt, is an important factor in the increase in the