United States Automobile Industry Essay Example | Topics and Well Written Essays - 3500 words

United States Automobile Industry - Essay Example Automobiles are durable experience goods that sell for a fairly high price. Consequently, as the purchase of a car constitutes a large investment for the average household, the demand for cars is fairly price and income elastic and strongly affected by macroeconomic conditions, including income trends, employment, and interest rates (Adams and Brock, 1995: 68). Because we look at competitive performance within the industry, however, we do not consider the industry's overall performance and its impact on the national economy. The US automobile industry is highly concentrated, with domestic production dominated by a tight triopoly. The top three firms, General Motors, Ford, and Chrysler (the 'Big Three'), account for 98% of domestic production. This high concentration started mainly in the 1930s. In the first three decades after the automobile was invented in the 1890s, more than 80 firms existed in the industry, with a number of companies entering and leaving the market every year. The number of companies that managed to stay efficient and profitable, and that survived the Depression in the 1930s, shrank to eight firms in the 1940s (White, 1982: 143). Since then, the Big Three have merged with or bought the remaining domestic firms. In the 1970s, however, US auto makers first began to face significant foreign competition. German and especially Japanese car markers, which were already established in their home markets, entered the US market with small, efficient cars that provided stiff competition for domestic producers. Today, imports account for about a quarter of the existing US market share (as opposed to 0.4% market share immediately after World-War II). This trend is reflected in Figure 1, which shows the market shares of the Big Three over our sample period. This considerable gain in market share for the foreign companies resulted mainly from the oil crisis of 1979, after which US consumers began to value fuel efficiency over size and style. The importance of barriers to entry in this industry is widely debated. In general, a long-run barrier is any cost or factor that permits market incumbents to earn supernormal returns while deterring entry. Examples include absolute (capital) costs, economies of scale, product differentiation, sunk exit costs, strategic behavior, special resources or licenses, and other legal restrictions. Because both incumbents and new entrants appears to enjoy the same benefits of economies of scale, these do not appear to constitute a major entry barrier in the US auto industry. White (1971: 38-53) estimates the minimum efficient scale of production in automobiles to be about 400,000 vehicles per year, which amounts to only an 8-10% market share. Absolute capital requirements, however, may be more important. New entrants in the automobile market must build a variety of plants, such as engine and final assembly plants, that require significant sunk costs, and establish a distribution and a dealers hip network to sell 400,000 units. According to the Department of Transportation this can easily cost over a billion dollars (Adams and Brock, 1990: 110). This large investment for the new entrant, along with the uncertainty of future success, provides a relatively high barrier to entry. Auto Industry and US Economics The automobile industry has long been viewed