Competitors interact

Q2: How do the competitors interact?

We use oligopolistic market structure to explain the interaction among those main players in American automobile market after financial crisis in 2008. The financial plunge and carbon emission issues have revolutionized the American automobile industry in three comprehensive impacts among these players, which are the stagnant growth in American automobile market, the demand of new engine systems to comply with new regulations, and the trend of smaller cars repositioning the American market.

Oligopolistic competition

The automobile industry is in oligopolistic competition market as explained in the first question. This form of competition applies in international automobile trade where there are so few global players that the predominant concern of each are with the possible behaviour of its rivals, with the threat of new entrants and with the risk of substitutes emerging through new technology (e.g. Hybrid cars or Electric cars ), changes in consumer taste (e.g. smaller cars, green theme) and external regulations. Therefore, the auto manufacturers will mutually depend, and this leads to their complicated behavior. However, the reaction functions among the peer companies are such diversified that can be decided by certain oligopoly models.

In particular, after certain states regulated the new auto carbon emission standard, these acts immediately cause a new entry barrier for existing auto manufacturers entering to green car market. Another barrier after financial crisis is new engine systems designed for green theme and economical purposes. For example, Toyota hybrid engine technology has successfully created a new barrier. After credit crunch, its hybrid engine has been commercialized than the peer automotive companies in American such as GM, Ford. The cost of R&D and advertisement in Toyota's hybrid engine is an unavoidable increase, if all things being equal in demand, in terms of cost, Toyota's hybrid product investment can create a significant barrier for those manufacturers who are not entering into mass production in green car market.

In the following figure, we assume AC0 is the average cost line for Toyota before developing green cars, and Q1 is their quantity. While AC0 is early declining into the horizontal, the competitors only reach the quantity of Q0, its average cost is near to the original players. Now we understand that Toyota has successfully produced hybrid cars, we can present Toyota R&D cost as the curve of AFCa, therefore the average total cost has become the Curve AC1, which is the sum up of AC0 and AFCa. Now we can observe main feature from this AC1 curve, when it increases its output, the unit cost decreases. To conclude, when Toyota deicide to leverage mass production in hybrid cars, it not only gains its market share from its peers, but also enforces them to join the mass production green cars market as the curve AC1 of Toyota. On the other hand, if GM, Ford and Honda, still keep its scale in Q0, which means they have not expanded their capacity in green car market and they will lose their market shares in the future. In fact, these companies have already produced few hybrid cars and electric cars to the market, however, the volume and quality are still in the early stage when comparing with Toyota's hybrid cars.

2 Non-collusion oligopoly: Game theory

The theory of games is “the study of alternative strategies that oligopolists may choose to adopt, depending on their assumptions about their rivals' behavior' (Sloman and Sutcliffe, 2001:241). After credit crunch, United States government bailed out the GM, Ford and Chrysler. In 2009, GM and Chrysler announced bankruptcy and began to restructure their business with the financial supporting from government. Here we saw the government interfere with the car market to protect the national interests and certain political purpose instead of the pursuit of market efficiency, which violates the free economy spirit but it successfully prevents the market failure in the automotive industry.

In addition, the government in this game is hoping that the bail out and financing debt can enhance the cash flow for GM to turn around, therefore it can facilitate the production of new generation green cars. The outcome of these government rescue plan will hurt the benefit of foreign automotive companies such as Toyota and Honda because of GM's stronger financial position and implementing green car projects. We assumed that the economic profit for only one producer (GM or Toyota) or two (GM and Toyota) before the government support is in the following:

GM

Toyota

Green car

Traditional car

Green car

A (-1,-1)

B (10,0)

Traditional car

C (0,10)

D (0,0)

Unit: $ billion

The economic profit after the government support is in the following:

GM

Toyota

Green car

Traditional car

Green car

A (-1,1)

B (10,0)

Traditional car

C (0,12)

D (0,0)

Unit: $ billion

Therefore, after the financial support from American government, $2 billion (we assumed), GM will become profitable,$1 billion, in Metric A, while Toyota has not sponsored from government and has still not arrived in the break-even point of producing green cars, which bottom line is unchanged -$ 1 billion. Finally, we assume that United States will deploy this policy to protect its domestic automotive market in developing new generation automobile and facilitate GM's turnaround.

Reference:

Sloman, J. and Sutcliffe, M. (2001) Economics for Business. Essex: Pearson Education

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