Competitive Pricing Behavior in the Auto Market: A Structural Analysis

Overview: This paper takes a theory-driven empirical approach to gain a deeper understanding of the competitive pricing behavior in the U.S. auto market. The ability-motivation paradigm posits that a firm needs both the ability and the motivation to succeed in implementing a strategy. They use arguments from the game-theoretic literature to understand firm motivation and abilities in different segments of the auto market. It then combines these insights from the game-theoretic literature and the ability-motivation paradigm to develop hypotheses about competition in different segments of the U.S. auto market. In estimating a structural model of the auto market, it address several methodological issues. A particular difficulty is the large number of car models in the U.S. auto market. Existing studies have inferred competitive behavior only in markets with two to four products. They also use relatively simple functional forms of demand to facilitate easy estimation. The model is static and does not have a dynamic component, either on the demand or the supply side. It has modeled heterogeneity using widely available aggregate level data for our analysis. The focus in this paper has been on price competition, treating other marketing mix instruments as unobserved variables that exogenously affect demand and, thus, prices. However, investigating how firms coordinate the use of multiple marketing instruments is an important issue for future research.

(Is this item miscategorized? Does it need more tags? Let us know.)

Format: PDF | Size: 500KB | Date: Jan 2001 | Pages: 19