Managerial Application

The Import Supply Battle in the U.S. Auto Industry

The "Big Three" U.S. manufacturers typically account for 60 percent to 65 percent of the U.S. market. Japanese name plates account for roughly 25 percent; European makes are responsible for the remainder. Despite a continuing erosion in market share during the 1980s and 1990s, General Motors (GM) remains by far the largest company in the U.S. auto market. GM's current market share is in the 30 percent to 35 percent range, followed by the Ford Motor Company with roughly 25 percent; DaimlerChrysler and Toyota with 10 percent to 15 percent each; Honda, roughly 6 percent; and Nissan, roughly 4 percent. Other companies, like Hyundai (Kia), Mazda, Mitsubishi, Subaru, and Volkswagen, account for the rest.

As companies fight for market share, many new products are aimed at market niches. Chrysler, for example, returned from the brink of bankruptcy in the 1980s to record profits in the 1990s on the basis of its astonishing success with minivans. At the same time, Ford took aim at Chrysler's lucrative Jeep franchise with the Ford Explorer and outran both Jeep and Chevrolet to take first place in the sport-utility vehicle (SUV) segment.

Meanwhile, Mercedes has made significant inroads in the luxury segment of the SUV market; Honda has successfully launched "economy" SUVs.

To gain entry into important market niches, everyone seems to be merging or working together. During recent years, GM bought Saab; Ford bought Jaguar, Land Rover, and Volvo; and Chrysler hooked up with Mercedes. The three largest U.S. manufacturers all enjoy important links with foreign producers, thus blurring the distinction between foreign and domestic vehicles. From a consumer's standpoint, import competition has been a beneficial spur to innovation and quality improvement, as it keeps the lid on auto industry prices and profits. The active interplay of demand and supply through stiff global competition seems to be the industry's—and the consumer's—best bet for an efficiently functioning auto market.

See: Sholnn Freeman, "GM, Ford Report Higher U.S. Sales, But Demand Is Beginning to Slow," The Wall Street Journal Online, December 4, 2001 (http://online.wsj.com).

supply curve

Relation between price and the quantity supplied, holding all else constant subcompacts at average industry prices in excess of, say, $21,000. This means that at relatively high average prices for the industry above $21,000 per unit, both foreign and domestic auto manufacturers would be actively engaged in car production. At relatively low average prices below $21,000, only foreign producers would offer cars. This would be reflected by different parameters describing the relation between price and quantity supplied in the individual firm supply functions for Korean and U.S. automobile manufacturers.

Individual firms supply output only when doing so is profitable. When industry prices are high enough to cover the marginal costs of increased production, individual firms expand output, thereby increasing total profits and the value of the firm. To the extent that the economic capabilities of industry participants vary, so too does the scale of output supplied by individual firms at various prices.

Similarly, supply is affected by production technology. Firms operating with highly automated facilities incur large fixed costs and relatively small variable costs. The supply of product from such firms is likely to be relatively insensitive to price changes when compared to less automated firms, for which variable production costs are higher and thus more closely affected by production levels. Relatively low-cost producers can and do supply output at relatively low market prices. Of course, both relatively low-cost and high-cost producers are able to supply output profitably when market prices are high.

The supply function specifies the relation between the quantity supplied and all variables that determine supply. The supply curve expresses the relation between the price charged and the quantity supplied, holding constant the effects of all other variables. As is true with demand curves, supply curves are often shown graphically, and all independent variables in the supply function except the price of the product itself are fixed at specified levels. In

The supply function specifies the relation between the quantity supplied and all variables that determine supply. The supply curve expresses the relation between the price charged and the quantity supplied, holding constant the effects of all other variables. As is true with demand curves, supply curves are often shown graphically, and all independent variables in the supply function except the price of the product itself are fixed at specified levels. In the automobile supply function given in Equation 4.8, for example, it is important to hold constant the price of SUVs and the prices of labor, steel, energy, and other inputs to examine the relation between automobile price and the quantity supplied.

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