Example 31 Designing New Automobiles

If you were an automobile company executive, how would you decide when to introduce new models and how much money to invest in restyling? You would probably know that two of the most important attributes of a car are its styling (e.g., design and interior features) and its performance (e.g., gas mileage and handling). Both styling and performance are desirable attributes; the better the styling and the better the performance, the greater will be the demand for a car. However, it costs money to restyle a car and to improve its performance. How much of each attribute should you include in the car?

The answer depends in part on the costs of production, but it also depends on consumer preferences for automobile attributes. Two characterizations of consumer preferences are shown in Figure 3.7. People with preferences shown in Figure 3.7a prefer performance to styling-they are willing to give up quite a bit of styling to get better performance. Compare these preferences to those of a different segment of the population shown in Figure 3.7b. These people prefer styling to performance, and will put up with poor gas mileage or handling to get a more stylish car.

Knowing which preference group is most prevalent in the population can help automobile company executives make strategic production decisions. One way to determine this is by conducting surveys in which individuals are asked about their preferences for a number of automobiles with differing combinations of styling and performance. Another way is to statistically analyze past consumer purchases of cars that varied in styling and performance. By relating the prices paid for different cars to the levels of the cars' attributes, one can determine the relative value attached to each attribute by various groups of consumers.2 Either approach can help determine whether the largest group of consumers values performance more highly (as in Figure 3.7a) or styling more highly (as in Figure 3.7b), and to what extent people in each group are willing to trade off one attribute for the other.

A recent study of automobile demand in the United States shows that over the past two decades most consumers have preferred styling over performance.3 The study divided all cars sold in the United States from 1977 through 1991 into nine market classes, ranging from subcompact to luxury sport. Within

For an example, see Vladimir Bajic, "Automobiles and Implicit Markets: An Estimate of a Structural Demand Model for Automobile Characteristics," Applied Economics 25 (1993): 541-551.

See Edward L. Millner and George E. Hoffer, "A Reexamination of the Impact of Automotive Styling on Demand," Applied Economics 25 (1993): 101-110.

FIGURE 3.7a and b Preferences for Automobile Attributes. Preferences for automobile attributes can be described by indifference curves. Each curve shows the combinations of performance and styling that give the same satisfaction. Consumers in (a) are willing to give up a considerable amount of styling for additional performance. The opposite is true for consumers in (b).

FIGURE 3.7a and b Preferences for Automobile Attributes. Preferences for automobile attributes can be described by indifference curves. Each curve shows the combinations of performance and styling that give the same satisfaction. Consumers in (a) are willing to give up a considerable amount of styling for additional performance. The opposite is true for consumers in (b).

each class, the degree of styling change was indexed from 1 (no visible exterior change, asinthe 1991 Honda Accord) to 5 (acompletesheetmetal change, as in the 1989 Buick Century) to 9 (a complete new body, a change in size, and a., conversion of rear-wheel to front-wheel drive, as in the 1980'Chevrolet Citation). The study found that automobile companies that emphasized style changes grew more rapidly than companies that emphasized performance. In particular, those cars undergoing major style changes enjoyed a significantly-higher growth in sales than cars not undergoing such changes. (The major effect occurred immediately after the style change, but smaller effects were felt in subsequent years.)

The importance of styling helps explain the growing share of Japanese imports in the United States-U.S. domestic sales grew at 1.3, percent per year, while sales of imports grew at 6.4 percent per year. On average, 15 percent of all domestic U.S. cars underwent a major style change each year, as compared to 23.4 percent of all imports. Clearly, styling changes (along with improvements in performance and reliability) spurred the growth of imported, cars. This has implications for the European Common Market; if Europeans respond to style changes as Americans have, Japanese penetration into European markets should increase over the next decade.

Was this article helpful?

0 0
Trash Cash Machine

Trash Cash Machine

How recyclable trash can save the world and bank us huge profits! Get All The Support And Guidance You Need To Be A Success At Recycling! This Book Is One Of The Most Valuable Resources In The World When It Comes To How To Make Profits With Trash!

Get My Free Ebook


Post a comment