Ricardo Falter
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The effects of oligopoly in the US Automobile sector on
pricing and development
Seminar paper
The effects of oligopoly in the U.S. automobile sector on pricing and product development
Maastricht University School of Business and Economics Maastricht, 13 December 2010 Falter, R.W.M. Study: International Business Writing Assignment: Main paper 1
Table of contents
1. Introduction
2
2. The Price Leader in the Oligopoly
2
3. How Prices are determined
3
3.1. Influences on the Surpluses and Welfare
3
4. Absence of the Bertrand-Nash Equilibrium
4
5. Punishment in the Cartel
4
6. Product Introduction
5
6.1. Applied Game Theory
7. Conclusion
5
6
2
1. Introduction
The US automobile industry is a good example of an oligopoly. It consists mainly of three major
firms, General Motors (GM), Ford, and Chrysler. The influence of this oligopoly can be seen in
the prices and the development and introduction of new car models into the American car market.
Extensive work has been done on the field of collusive behaviour in the US automobile market
and moreover the introduction of the small car in the 1950s shows how the firms collude when it
comes to the introduction of a new car.
This paper will show which firm is the price leader in the GM, Ford, and Chrysler oligopoly and
explain how prices are determined, in this step there will be drawn a comparison between the
surpluses and welfares in this oligopoly and a perfect competition. Then it will be analysed why
there cannot be found a Bertrand-Nash Equilibrium. The oligopoly in the American automobile
industry is collusive, because of that, it will after that be pointed out how price cheaters are
punished in that cartel. Finally the underlying decisions of an introduction of a new car model
will be examined and the game theory will be applied to that.
2. The Price Leader in the Oligopoly
In the oligopoly of the American automobile industry a vivid dynamic between price leaders and
price followers can be found. Here the example of the pricing decisions between 1965 and 1971
shows strong evidence that General Motors is the price leader in this oligopoly (Boyle &
Hogarty, 1975). In this time span Chrysler always announced its price increases first, after that
General Motors announced a price increase which was smaller than Chrysler’s. General Motors’
move then led to Chrysler reducing its own price to be roughly the same as General Motors’
(Boyle & Hogarty, 1975). Boyle and Hogarty (1975) do not mention explicitly how Ford
behaved in that pricing arrangement but it can be assumed that Ford is a price follower who in
the end copies General Motors’ chosen price.