Automotive Industry as a Oligopoly Assignment

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Automotive Industry as an Oligopoly

Introduction

The automotive industry is a complex industry associated with producing, retailing, maintaining, and wholesaling motor vehicles. The current economy has dramatically shifted, triggering development in emerging markets, accelerating the rise of new technologies in emerging markets, and shifting consumer preferences. Increased automation, digitization, and new business models have changed other industries, and the automotive industry is no exception. This paper will clarify the automotive industry by giving an overview of the industry’s history and current state, focusing on the oligopoly market structure.

Automotive Industry Overview

The automotive industry is one of the most vital economic sectors by revenue. The industry has a significant multiplier impact since it is imperative for upstream industries, such as chemicals, textiles, and steel, and down streams, such as mobility, and IT services (White, 2013). There are a few dominant firms in the automotive industry. These include General Motors, Ford, and Chrysler in the United States; Volkswagen, BMW, and Daimler in Germany; and Toyota, Honda, and Nissan in Japan. These firms have a large share of the global market for automobiles, and they compete against each other in many different markets around the world.

The automotive industry is in the midst of a significant transformation. A confluence of macroeconomic, technological, and demographic changes is reshaping how consumers view transportation and, as a result, the auto industry. In this rapidly changing environment, companies are preparing for a future in which electrification, autonomous driving, connectivity, and mobility services upend the status quo (Grieco, Murry & Yurukoglu, 2022). Many incumbents proactively invest in new technologies and business models, while startups and tech giants make inroads with their own innovative offerings. The auto industry is facing an inflection point, and the companies that succeed in the next era will be those that are able to navigate these changes and emerge as leaders in a new transportation ecosystem.

Oligopoly Market Structure

In economics, an oligopoly is a market structure with only a few sellers. In an oligopoly market, one firm’s decisions can significantly impact the other firms in the market (Shuai, Yang &Zhang, 2022). This is in contrast to other market structures, such as perfect competition and monopolistic competition, where the decisions of one firm have little or no impact on other firms in the market. Ideally, in an oligopoly market, the firms are constantly competing, and there is no clear leader in the market. The oligopoly market structure consists of a few large forms that have substantial influence over the market and industry. While the large forms have a significant deal of market influence, no establishment within the set has greater power to undermine the other or steal the market.

Considerably, in an oligopoly market, when one corporation sets a price, the other companies tend to respond to ensure that they maintain their customers. Due to the level of competition in the oligopoly, the prices tend to be higher than in perfect competition. Since there are no dominant forces in an oligopoly market structure, companies can be influenced to conflict with each other rather than compete fairly, leading to non-established players entering the market. In an oligopoly market, the companies can build product scarcity and fix prices without competition, resulting in inferior services and products and higher costs for buyers.

Market Environment and Structure of the Automobile Industry

The automotive industry is an oligopoly since it exists in a market structure in which a few firms have the majority of the market share. This means that a few large firms dominate it. The largest firms in the industry are General Motors, Ford, and Fiat Chrysler. In an oligopoly, one firm’s decisions can significantly impact the other firms in the market (Bloch, Eaton & Rothschild, 2014). These firms have a large share of the market and are able to control prices. The automotive industry is global in scope, with the three largest firms in the industry all based in different countries. This gives them a significant advantage over smaller firms that are only operating in one country or region.

There are reasons the automotive industry is considered an oligopoly. First, only a handful of large firms dominate the market. These firms have economies of scale, which allow them to produce cars at a lower cost than smaller firms. Second, these firms have significant barriers to entry, such as great investment necessities and access to distribution networks. As a result, it is difficult for new firms to enter the market. Finally, these firms often engage in price fixing and other collusive behavior, limiting competition.

The automotive industry is capital-intensive, so much money is required to produce the vehicles. The high cost of production makes it difficult for new firms to enter the market. The automotive industry is also technology-intensive, so there is a constant need for new and innovative technologies to be developed to produce vehicles. The high cost of research and development can make it difficult for new firms to enter the market. The automotive industry is a global one, which means it is present in many countries worldwide. The firms operating in this industry need to be able to operate in multiple countries to be successful.

The Effects of Oligopoly in the Automotive Industry

The automotive industry is one of the most oligopolistic industries in the world, with a handful of firms accounting for the vast majority of sales. The industry is characterized by high barriers to entry, high fixed costs, and a need for scale to be profitable. These features make it difficult for new firms to enter the market and compete with incumbents. The oligopolistic nature of the automotive industry has led to a number of challenges for firms operating in the market. The industry has recently been characterized by declining sales, intensifying price competition, and thinning profit margins. These trends have put pressure on firms to find ways to cut costs and improve efficiency. In the locomotive industry, large firms control most of the market share. In such an oligopoly, firms typically collude with one another in order to keep prices high and maintain their profits.

Since the early days of the automobile industry, there have been allegations of collusion and antitrust violations. In recent years, these allegations have resurfaced with increased frequency in light of the ongoing consolidation in the industry. Oligopoly plays in facilitating or constraining competition in the automotive industry. The industry is currently in the midst of a wave of consolidation. This consolidation has been driven by various factors, including technological change, shifting consumer preferences, and the rise of China as a major player in the global automotive market. This consolidation has led to fewer firms competing in a highly concentrated industry. The four largest automakers – General Motors, Ford, Toyota, and Fiat Chrysler – accounted for the largest percentage of all vehicle sales in the United States in 2016. This level of concentration is well above the threshold that the Department of Justice uses to define an oligopoly.

The high concentration level in the automotive industry has several implications. First, it gives the largest firms a great deal of market power. These firms can use their size and scale to exert significant influence over prices, product offerings, and other aspects of the market. This influence can be used to stifle competition and maintain high profits. The concentration of the automotive industry makes it difficult for new firms to enter the market. The large incumbents have a significant advantage in resources, brand recognition, and customer loyalty. This barrier to entry protects the incumbents from the competition and allows them to earn high profits.

The oligopolistic nature of the automotive industry leads to a high degree of interdependence among firms. Because each firm has a significant impact on the market, they must carefully consider their rivals’ actions when making decisions. This can lead to a lack of innovation as firms are hesitant to introduce new products or technologies that may give their rivals an advantage. The automotive industry is characterized by a high degree of advertising and promotion. Firms spend billions of dollars annually on advertising to differentiate their products and persuade consumers to purchase them. This intense competition can lead to higher prices for consumers.

Effect of Market Structure on Entry

Due to the structure of an oligopoly market, new forms tend to find it challenging, if not impossible, to enter into oligopolistic markets. This is primarily linked to strong competition from well-established companies and the successful big firms dominating the space and their wide range of competitive products and service offerings, which include mass and premium markets. For companies with similar offerings, it’s challenging to penetrate the market. This requires large capital to operate to ensure a production cost advantage. For instance, it is extremely difficult for a new entrant to penetrate the market in Auto market. Big firms such as BMW, Audi, and Toyota have been in the market for many years with very successful product lines. They are continuously innovating to maintain their position in the industry. They have also carved out clear niches in terms of target markets and product offerings. This means that, for a new firm to enter into oligopolistic markets and be successful, it must come up with a unique offering, or it will struggle to compete against well-established companies.

The structure to entry presents a challenge for new firms trying to enter into oligopolistic markets as they need a significant amount of capital and have to offer unique products or services to compete. For example, in the automotive industry, it would be very difficult for a new firm to come in and try to compete against the big three automakers. The barriers to entry can also be used as a tool by the existing firms in the market to protect their market share and maintain their position. For example, the big three automakers in the United States have been using their financial resources and economies of scale to keep new entrants out of the market. The oligopolies can present challenges for both new and existing firms trying to operate in these markets. New firms must have deep pockets and offer unique products or services to compete, while established firms can use their incumbency advantages to protect their market share. Either way, firms need to be aware of the challenges of oligopolistic markets and develop strategies to overcome them.

Pricing in the Oligopoly Automotive Industry

The Oligopoly of the Automotive Industry shows how this market structure results in large firms being price leaders. There is a difference in how prices are determined in an Oligopoly market compared to the perfect competition (Falter, 2011). In perfect competition, the market participants must focus on the market price since the market is competitive and efficient. However, for oligopoly, the collusive companies such as Ford, General Motors, and Chrysler result in a collusive price, which is determined by a joint decision to ensure that it’s above the marginal costs. These firms have a large share of the market and can influence prices.

The Benefits and Limitations of the Automotive Oligopoly Industry

The oligopolistic nature of the automotive industry has both benefits and drawbacks. One benefit is that it allows large firms to achieve economies of scale, which lowers their production costs and makes them more competitive. Another benefit is that the oligopoly provides consumers with a wide range of car types and brands (Ferràs-Hernández, Tarrats-Pons & Arimany-Serrat, 2017). For instance, General Motors offers various vehicles under various brands, such as Chevrolet, Buick, and Cadillac. This variety gives consumers more choices and helps to keep prices in check.

However, the oligopolistic nature of the automotive industry also has some drawbacks. One drawback is that it can lead to collusion among firms, which can result in higher consumer prices. Another drawback is that large firms often have great power over suppliers and dealers, which can result in higher prices and lower quality. The oligopolistic nature of the automotive industry can lead to a great deal of concentration of power, which can be bad for consumers and the economy.

Another drawback is that it can lead to price wars among firms, eroding profits and damaging the industry as a whole. For instance, the automotive industry has seen several price wars. The Japanese automakers were engaged in a price war in the late 1980s and early 1990s, which led to heavy losses for all firms involved (Ueno & Muto, 2017). In a price war, firms compete by lowering prices to attract customers. This can lead to a decline in profits for all firms involved.

Another drawback is that the large size of the firms can make them less nimble and responsive to change, leading to them losing market share to smaller, more agile firms. Another is that it can limit innovation, as large firms are often risk-averse and reluctant to invest in new technologies. For instance, the electric car market is currently dominated by smaller firms such as Tesla, while the major automakers have been slow to enter the market.

Conclusion

In summation, the automotive industry is an oligopoly. There are a few dominant firms that control the majority of the market. The oligopolies have significantly influenced the output, prices, and power market. The oligopoly automotive firms must carefully consider the actions of their rivals in order to maintain their market share. The industry is also characterized by intense advertising and promotional activity, leading to higher consumer prices.

Automotive Industry as a Oligopoly Assignment: References

Bloch, H., Eaton, B. C., & Rothschild, R. (2014). A dynamic model of oligopolistic market structure featuring positioning investments. International Journal of the Economics of business, 21(3), 379-411.

Falter, R. (2011). The effects of oligopoly in the US Automobile sector on pricing and development (Vol. 117). GRIN Verlag.

Ferràs-Hernández, X., Tarrats-Pons, E., & Arimany-Serrat, N. (2017). Disruption in the automotive industry: A Cambrian moment. Business Horizons, 60(6), 855-863.

Grieco, P. L., Murry, C., & Yurukoglu, A. (2022). The Evolution of Market Power in the US Automobile Industry. Working paper.

Shuai, J., Yang, H., & Zhang, L. (2022). Dominant firm and competitive bundling in oligopoly markets. Games and Economic Behavior, 132, 421-447.

Ueno, H., & Muto, H. (2017). The Automobile Industry of Japan. In Industry and Business in Japan (pp. 139-190). Routledge.

White, L. J. (2013). The automobile industry since 1945. In The Automobile Industry since 1945. Harvard University Press.

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