The Impact of Imports on Price Competition in the Automobile Industry

By Ramrattan, Lall B. | American Economist, Fall 1991 | Go to article overview

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 may have formed an auto cartel via voluntary import quotas, we hypothesized that domestic ad foreign firms may have colluded in price policies for those years in which the hypothesis has failed.

The Model

The statistical model for the determination of price uniformity is expressed formally thus: [Mathematical Expression Omitted] where p = price, X = quality characteristics, U = an error term, i = ith model, and t = time period which runs from 1 to k.

In that test, the term "quality" refers to weight, height, length, width, engine size, number of doors, power steering and brakes, and other similar brand characteristics. The performance index represents horsepower divided by curb weight; the comfort index, head and leg room times width. Price refers to list or factory-delivered suggested retail price. It includes standard equipment, federal excise tax, and dealer fee, and excludes state and local taxes and transportation costs.

Boyle's and Hogarty's (1975) best specification was the log of price on thee log of comfort and performance, and a dummy variable for power amenities. The log variables are weighted by the share of U. S. car model year output. In cases where import brands are used, the close comparable share data is imported new-car sales in the U.S.

The null hypothesis ([H.sub.0]) is that estimated list price-attribute relationships are nondifferent among General Motors, Ford Corporation, and Chrysler Corporation. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Impact of Imports on Price Competition in the Automobile Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.