This paper offers an interesting analysis of the automobile industry. The paper covers a number of subjects include the structure of the industry, level of competition and behavior of players.

1. 1
Automobile Industry
Automobile Industry
1. Market Model
Automobile is one of the industries that have experienced changes in its market model in
the last five decades. The automobile industry is one of the world’s most essential economic
sectors (Nag, Banerjee & Chatterjee, 2007). This industry involves the manufacture,
development, design, marketing and selling of vehicles. The industry was established in 1886
after Karl Benz built the first practical vehicle. In the early periods the industry was
characterized by huge manufacturers who were responsible for most of production activities
including; design, manufacture of parts, assembling, marketing and selling (Nag, Banerjee &
Chatterjee, 2007). In the industry’s pioneering era, there was a lot of protectionism. Different
countries protected there automobile manufacturers through import bans and high tariffs. This
resulted in limited competition within the industry and the creation of a monopolistic market
model. However, the market structure changed in the second half of the 20th
century. The
changes were introduced by the liberalization of the major economies of the world.
Elimination of protectionism introduced competition within the automobile industry.
Many players joined the industry leading to further competition and the creation monopolistic
compensation. In the 1980s, competition in the automobile industry was at its peak as companies
priced each other out of the market (Nag, Banerjee & Chatterjee, 2007). Companies could no
longer sustain the price battles as they had exhausted all avenues for improving efficiency. This
situation was compounded by changes in labor and consumer markets. Many companies found it
increasingly difficult to operate. In the 1990, the market model began to change as the
automobile companies began to merge. Chrysler merged with Benz; Kia merged with Hyundi;
while Ford acquired Volvo, Jaguar and Mazda (Hashmi & Biesebroeck, 2009). Consolidation led

2. 2
Automobile Industry
to reduced competition within the industry. It also made it difficult for new company to enter and
survive in the industry. This scenario resulted in the creation of an oligopolistic market model.
The oligopolistic market was sustained further by the specialization within the industry.
Different manufacturers have specialized in producing vehicles for specific market niches thus
reducing competition (Hashmi & Biesebroeck, 2009). Firms have also specialized in terms of the
level of production with each firm opting to operate with one level. Some companies have
specialized in production of parts; others specialize in assembly; others in design; while others
deal solely with marketing and selling. This has further eliminated competition within the
industry.
2. Short Term and Long Term Behavior
Oligopolistic market model place more emphasis on differentiation rather than price
competition (Dune & Klimek, 2011). Automobile companies are trying to increase market shares
in the short term through various differentiation strategies. These strategies include making
stylish models; making fuel efficient vehicles; increasing safety and durability and marketing.
There is a general tacit collusion when it comes to setting prices. This is where players do not
change their prices because they fear that competitors will respond by also cutting prices. Since
the players in the oligopolistic markets are large, they cannot change their in strategies easily,
especially prices (Dune & Klimek, 2011). This tacit collusion has resulted in higher margins for
the companies and consequently higher profits.
The players in the automobile industry are likely to maintain abnormal profits in the long
run. This is because the oligopolistic market is characterized by high entry barriers (Dune &
Klimek, 2011). New players have little chance of entering and surviving in this market. Thus,
lack of new entrants in the market is likely to have little impact on prices and, therefore, existing

3. 3
Automobile Industry
firms are likely to continue enjoying the same level of profit. The only factor that will affect
prices in the industry is demand. Demand many be influenced by changes in population and the
purchasing power of the population.
3. Transactional Cost
Transactional cost is the cost associated with maintaining business relationships with
independent parties (Tedelis & Williamson, 2010). One of the areas that could result in
transactional cost for the automobile companies is the acquisition of supplies/ input. The
automobile industry has become very specialized in terms of level of production. Today, parts
are produced by different firms and supplied to the auto manufacturers for assembly. Contracting
independent companies to produce and supply parts rather than having brand manufacturer
producing the parts, has resulted in high transactional cost (Tedelis & Williamson, 2010). These
transactional costs include the cost of switching, costs of governance, transportation, inspection,
and inventory.
The second area in which the automobile companies incur transactional cost is marketing
and selling (Tedelis & Williamson, 2010). Most automobile manufacturers do not market and
sell their brands directly, but depend on dealers in various markets to sell their products. This
distribution model is a major source of transactional cost. The third source of transactional cost
is financing (Tedelis & Williamson, 2010). Most automobile firm depends on external entities to
handle their financing issues. These companies often depend on equity, loans and bond to
finance their activities. This means that the have to deal with external entities such as; banks; the
stock exchanges; finance consultant and many others. Dealing with financial institutions
increases the transactional cost as the financial institutions must make money from their
relationship with the automobile firms.

4. 4
Automobile Industry
4. Behaviors that Could Result in Transaction Cost
One of the behaviors that can results in increased transaction cost is high specialization
within the industry (Tedelis & Williamson, 2010). High specialization is likely to lead to many
and complex vertical and horizontal relationships within the industry. Another behavior that is
likely to increase transaction cost is opportunism (Tedelis & Williamson, 2010). Subcontracting
of independent companies in order to get essential inputs or services can expose the firm to
opportunism by the suppliers. The suppliers may issue the products or services at higher prices
with the aim of making higher profits. One way of dealing with this behavior is to establish
effective governance structures. Another strategic way of dealing with these behaviors is
establishing close and long term relationships with the suppliers. Legal contracting is also an
effective strategy for dealing with opportunism.
5. Factors that Affect Competitiveness
One of the factors that affect the level of competition in the industry is the number of
competing firms. High concentration in an industry results in fierce competition which leads to
drop in prices (Nag, Banerjee & Chatterjee, 2007). The automobile industry was previously very
competitive as it consisted of many players. Today, competition has reduced due to mergers
between competing firms. Another determinant of competitiveness is the size of the market. A
bigger market results in lower level of competitiveness, since there is adequate demand for every
player (Nag, Banerjee & Chatterjee, 2007). The market for automobile products is gradually
expanding, with the expansion being driven by growth in population and increased purchasing
power of consumer. Consequently, each firm is establishing its own niche in the market resulting
in reduced competitiveness.

5. 5
Automobile Industry
References
Dune T. & Klimek S. (2011). Entry, Exit and the Determinant of Market Structure. August 28,
2012. http://www.econ.psu.edu/~mroberts/dkrx-rev.pdf
Faille C. (2010). Revenue Forecasting Methods. August 27, 2012.
http://www.ehow.com/list_6869859_revenue-forecasting-methods.html
Hashmi A. & Biesebroeck J. (2009). “Market Structure and Innovation: The Automotive
Industry”. August 15, 2012.
http://www.cepr.org/meets/wkcn/6/6679/papers/vanBiesebroeckFinal.pdf
Jerenez A. (2008). Revenue Management and Survival Analysis in the Automobile Industry.
USA. Springer Publishers
Nag B. Banerjee S. & Chatterjee R. (2007). Changing Features of the Automobile Industry in
Asia. August 15, 2012. http://www.unescap.org/tid/artnet/pub/wp3707.pdf
Tedelis S. & Williamson O. (2010). Transaction Cost Economics. August 28, 2012.
http://faculty.haas.berkeley.edu/stadelis/tce_org_handbook_111410.pdf

6. 5
Automobile Industry
References
Dune T. & Klimek S. (2011). Entry, Exit and the Determinant of Market Structure. August 28,
2012. http://www.econ.psu.edu/~mroberts/dkrx-rev.pdf
Faille C. (2010). Revenue Forecasting Methods. August 27, 2012.
http://www.ehow.com/list_6869859_revenue-forecasting-methods.html
Hashmi A. & Biesebroeck J. (2009). “Market Structure and Innovation: The Automotive
Industry”. August 15, 2012.
http://www.cepr.org/meets/wkcn/6/6679/papers/vanBiesebroeckFinal.pdf
Jerenez A. (2008). Revenue Management and Survival Analysis in the Automobile Industry.
USA. Springer Publishers
Nag B. Banerjee S. & Chatterjee R. (2007). Changing Features of the Automobile Industry in
Asia. August 15, 2012. http://www.unescap.org/tid/artnet/pub/wp3707.pdf
Tedelis S. & Williamson O. (2010). Transaction Cost Economics. August 28, 2012.
http://faculty.haas.berkeley.edu/stadelis/tce_org_handbook_111410.pdf