A Group Project assessing Tesla Motors in regards to Coase Conjecture

1. TESLA MOTORS
BU 7541 Economics for Global Markets
Trinity College Dublin Business School

2. Tesla’s mission is to
accelerate the world’s
transition to sustainable
energy sources.
Tesla is not just an
automaker: it is a
technology and design
company with a focus
on energy innovation.
Foundation
Founded in 2003 by a group
of engineers in Silicon
Valley who wanted to prove
that electric cars could be
better than gasoline-
powered cars.
Manufacturing
The company is expanding its
manufacturing footprint into
other areas, including in
Tilburg, the Netherlands,
where it has an assembly
facility, and Lathrop, California,
where it has a specialized
production plant.
Leadership
Elon Musk
3Tesla Motors 03

3. COASE CONJECTURE
“A durable-goods monopolist can lose his
monopoly power because the consumers are
expecting a fall in price in the future and are
unwilling to pay more than the competitive price
for the early units of a good”- Thépot, 1998
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4. Under these assumptions, Tesla is
testing the Coase Conjecture.
COASE CONJECTURE - MODEL 3 5
This results in a reduction of demand
and market power today as consumers
postpone their purchase decision and
convert from Model S to Model 3.
Two assumptions:
• Tesla operates as a monopolist selling a durable good.
• Consumers who are served once do not come back to the market again.
Consumers who would might buy Model S today decide to wait to purchase,
expecting a lower price for Model 3. These consumers consider the Model 3 a
substitute for the Model S. Hence, Tesla creates its own competition.
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5. OPPOSING EFFECTS OF MODEL 3
PROFIT
LOSS*
NEGATIVE SPILL-OVER
EFFECTMODEL S Consumer Segment
MODEL 3 Consumer Segment
*Profit loss due to Coase Conjecture.
Profit margin of Model S ≈ 25%; profit
margin of Model 3 < 25% (Eckl-Dorna
and Sorge, 2016).
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Consumer segmentation, explored in depth below, decreases the impact of the
Coase Conjecture, but cannot circumvent it completely. Consequently, a hybrid
situation arises.
A third assumption: Some, but not all customers, that can afford to buy Model S,
convert to Model 3 in the expectation of a lower price for a product that they consider as a
substitute. For a technical comparison of Model S and Model 3, see Appendix A.
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6. PRICING STRATEGY : VARIABLES
Tesla’s future pricing strategy, which has the purpose of resolving the Coase
Conjecture, relies on three variables:
PRICING
STRATEGY
Tesla aims to
satisfy current
demand and
attract all
residual
consumers in
each segment.
Model S
E-Segment
(Executive)
Model X
J-Segment
(Sport Utility)
Model 3
D-Segment
(Large Cars)
R&D of each
previous
model lowers
innovation
costs for later
models,
raising profit
margins
SEGMENTATIO
N
DEMAN
D
INNOVATIO
N
707
(European Commission, 1999).

7. By offering new products distinguish from previous offerings, Tesla adapts prices to appeal to
new target audiences without decreasing the intrinsic value of previous models. Hence, the
company aims to maximize market coverage with a wider portfolio of products and minimize the
impact of Coase Conjecture.
CURRENT PRICING STRATEGY
Model Price*
Roadster $ 109,000
Model S $ 55,000
Model X $ 75,900
Model 3 $ 35,000
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* Tesla’s base price, not including
customisation or incentives.
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With Model 3, Tesla hopes for access to a new
consumer segment: the mass-market.
(Bloomberg, 2016).

8. PRICING STRATEGY : FUTURE EXPECTATIONS
Determined by
innovation and
differentiation by
consumer segment.
Price
Make all transport
sustainable by
entering each
segment with an
appropriate electric
vehicle.
Long Term Vision
Preserve monopoly
power in each
consumer segment
through 3rd degree
price discrimination.
Objective
Tesla seems to utilize 3rd degree price discrimination through product versioning and customer
segmentation. Based on the current data, Tesla reinforced their position in the electric car industry
with the Model 3 announcement by strengthening their current strategy.
By providing different models for different consumer segments, they strengthen their monopoly
power and work to resolve the Coase Conjecture.
909

9. Operational pressure points:
• A history of not meeting production targets.
• Aggressive deadlines and targets increases risk of
quality issues (which in turn push back previously
set goals, causing a vicious cycle).
• Musk’s tendency to over-promise and under-
deliver could undermine the attractiveness of the
Model 3, as well as future successes.
(Pulliam, Ramsey and Dugan, 2016).
Financial/investment pressure points:
• Musk’s financing of Tesla through inter-company
loans (between Tesla and SpaceX, Tesla and
Solar City) could destabilize the company (Pulliam,
Ramsey and Mullins, 2016).
• As of 2016, Tesla only has one profitable quarter
(Pulliam, Stoll and Grant, 2016).
• Tesla needs investors to make continued
progress, and they are motivated mainly by their
belief in Musk himself (Vance, 2016).
For Tesla’s price discrimination strategy to effectively counterbalance the Coase Conjecture, the company
must provide an attractive option for new and different consumer segments. However, Tesla’s financial,
operational and investment history could reduce or eliminate the benefits this strategy might provide.
Tesla’s history of missing past operational and financial targets could lead potential customers lose faith in
the company, and lead investors to lose faith in Musk. This could exacerbate and already tenious financial
situtation, bring progress to a halt and cause potentially catastrophic repercussions for Tesla.
PRESSURE
10
STRATEGY AT RISK

10. TESLA PUSHES MODEL S SALES
MODEL S Consumer Segment
MODEL 3 Consumer Segment
NEW PROFIT LOSS*
* An increase in profit loss results from the affordability of the Model S at a lower price,
expanding the Model S Segment at the expense of Model 3.
By lowering the price of the Model S, Tesla exacerbates the Coase Conjecture,
and undermines their monopoly power.
Tesla is aggressively trying to meet production targets for the Model 3 (and hence raise credibility) by shifting
demand from Model 3 to a lower-priced Model S (see Appendix B). If successful, this alleviates operational
problems constraining production. Selling the Model S at a more competitive price today, rather than waiting until
year-end 2017 for the Model 3, also helps alleviate financial pressures.
PROFIT
LOSS*
MODEL S Consumer Segment
MODEL 3 Consumer Segment
911

11. GROWING COMPETITION 12

12. BRAND CURRENT STATE FUTURE PLANS
Audi Hybrid e-Tron range All-electric e-Tron models set for 2018 production
BMW Hybrid i3 and i8 All-electric Mini expected in 2019, electric X3 in 2020
Ford Hybrid cars All-electric Focus in 2017
Hyundai Hybrid cars All-electric Ioniq in winter 2017
Mercedes-Benz 1 all-electric car and 3 hybrid models Insiders stated new all-electric sub brand to be launched by 2020
Nissan Sales leader in all-electric cars in USA Committed to improving existing models
Toyota Hybrid cars Some rumors about all-electric models in 2020
Volkswagen All-electric Golf model Said to offer 30 all-electric and hybrid models by 2025
Volvo 2 Hybrid models First all-electric model set for 2019 launch
In 2015 the threshold of 1 million EV cars was surpassed. Since then, battery costs have declined and energy density has
increased. Policy support increases sales, thereby enlarging individual market share and reducing technology costs (IEA,
2016). Tesla faces incoming competition from established car manufacturers, making the above strategies essential.
INDUSTRY: PEER OVERVIEW 13
(Audi, 2016; BMW, 2016; Ford, 2016; Hyundai, 2016; Mercedes-Benz, 2016; Nissan, 2016; Toyota, 2016; Volkswagen, 2016; Volvo, 2016; Duffer, 2016;
Shahan, 2016; Rosevear, 2016; EV Obsession, 2015; Korosec, 2016).

13. Tesla must keep core strategies in mind if attempting to preserve monopoly power:
→ Demand: expand market share by offering distinctive models to increase sales and
revenue from diverse consumer segments.
→ Consumer segmentation: make effective use of 3rd degree price discrimination to
minimize the negative spill-over effect and profit losses due to the Coase Conjecture,
as well as fulfil the needs of different consumer segments.
→ Innovation: constant innovation and product differentiation to retain monopoly power
in the face of increased competition.
INSIGHT: WHAT CAN WE LEARN FROM TESLA?
Offering distinct models to cover more consumer segments and thus a bigger market creates both
opportunities and threats in regard to potential profit losses due to the Coase Conjecture
Perhaps even more important: to retain monopoly power and alleviate the impact of a Coase
Conjecture, Tesla must also change company policies to generate long-term stability:
• Ensure constant quality and innovation to keep up with growing competition.
• Set, and meet, realistic production output and financial targets retaining customer trust and
investment attractivess.
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14. CONCLUSION
Based on our assumption, by offering a car which costs less than half of its luxury Model S, Tesla is
testing the Coase Conjecture. The company uses price discrimination & segmentation strategies
as a tool to resolve the Coase Conjecture – it remains to be seen whether it will work.
Operational and financial pressure points put the company at risk of undermining the benefits of
their strategy as the history of missing operational and financial targets could lead potential
customers and investors to lose faith, deterring consumers from purchasing.
Tesla currently faces a monopolistic market with few competitors, but there are more competitors
entering the electronic car market immenently. This could lead to a more competitive market and
eventually, force Tesla to abandon monopoly power and become a price-taker.
To retain power, Tesla must set and meet realistic production goals, as well as maintain
constant innovation and quality to stay ahead of growing competition.
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15. REFERENCES
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16. REFERENCES 18
• Audi. (2016). Audi e-tron. Retrieved from: https://www.audi.co.uk/audi-innovation/e-tron.html.
• Ayre, J. (2016). Tesla Actively Trying To Sell Model S 60s To Model 3 Reservation Holders. Retrieved from
http://evobsession.com/tesla-actively-trying-sell-model-s-60s-model-3-reservation-holders/.
• Bloomberg. (2016). Electric Fantasy: Will the Next Tesla Sell for $25,000? Retrieved from:
https://www.bloomberg.com/news/articles/2016-02-09/will-the-tesla-model-3-really-sell-for-25-000.
• BMW. (2016). BMW i. Retrieved from https://www.bmwusa.com/vehicles/bmwi.html.
• Business Insider/ (2016). The preorders for Tesla's new car outstrip the total sales of all other Teslas to date.
Retrieved fromhttp://uk.businessinsider.com/tesla-model-3-orders-vs-lifetime-sales-2016-4?r=US&IR=T.
• Duffer, R. (2016). 8 Electric vehicles competing with the Tesla Model 3. Retrieved from
http://www.chicagotribune.com/classified/automotive/fuelefficient/ct-electric-vehicles-competition-model-3-
20160401-story.html.
• Eckl-Dorna, W. and Sorge, N. (2016). Tesla Model 3 - Also sprach Elon. Spiegel Online. Retrieved from
http://www.spiegel.de/wirtschaft/unternehmen/tesla-model-3-die-elektroauto-revolution-ein-pro-und-contra-a-
1085071.html.
• European Commission. (1999). Regulation (EEC) No 4064/89 Merger Procedure.
• EV Obsession. (2015). 10 Best Electric Cars. Retrieved from http://evobsession.com/10-best-electric-cars/.
• Ford (2016). Ford Hybrid and Electric Vehicles - The Lineup. Retrieved from http://www.ford.com/new-
hybrids-evs/?gnav=header-cars.

17. • Hyundai (2016). Ioniq. Retrieved from https://www.hyundaiusa.com/ioniq/index.aspx.
• International Energy Agency (IEA) (2016). Global EV Outlook 2016 - Beyond one million electric cars.
Retrieved from https://www.iea.org/publications/freepublications/publication/Global_EV_Outlook_2016.pdf.
• Korosec, K. (2016). Audi Plans to Launch a New Electric Vehicle Model Every Year. Retrieved from
http://fortune.com/2016/05/12/audi-plans-to-launch-a-new-electric-vehicle-model-every-year/.
• Mercedes-Benz (2016). Hybrid and Electric. Retrieved
fromhttps://www.mbusa.com/mercedes/vehicles#!layout=/vehicles/showroom/EDV&waypoint=EDV.
• Motortrend. (2016). Electrifying S3X: Tesla Model 3 In-Depth – Exclusive Photos and Analysis. Retrieved on
30.12.2016, from: http://www.motortrend.com/news/tesla-model-3-photos-analysis/.
• Nissan (2016). Nissan Electric Vehicles. Retrieved from https://www.nissan.co.uk/range/electric-cars.html.
• Pulliam, S., Ramsey, M. and Dugan, I. (2016). Elon Musk Sets Ambitious Goals at Tesla — and Often Falls
Short. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-sets-ambitious-goals-
at-teslaand-often-falls-short-1471275436.
• Pulliam, S., Ramsey, M. and Mullins, B. (2016). Elon Musk Supports His Business Empire With Unusual
Financial Moves. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-supports-
his-business-empire-with-unusual-financial-moves-1461781962.
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REFERENCES

18. 20
REFERENCES
• Pulliam, S., Stoll, J. and Grant, C. (2016). Elon Musk Faces Cash Squeeze at Tesla, SolarCity. The Wall
Street Journal. Retrieved from http://www.wsj.com/articles/elon-musk-faces-cash-squeeze-at-tesla-solarcity-
1472687133/.
• Rosevear, J. (2016). How Will Audi's Electric Vehicles Stack Up Against Tesla Motors? Retrieved from
http://www.fool.com/investing/2016/08/31/how-audi-will-try-to-challenge-tesla-motors-with-a.aspx.
• Shahan, Z. (2016). Tesla Crushes Electric “Competition” in US. Retrieved
from:https://cleantechnica.com/2016/01/05/tesla-crushes-electric-competition-in-us/.
• Tesla. (2016). Models. Retrieved from https://www.tesla.com/en_IE/models/.
• Thépot, J. (1998). A direct proof of the Coase conjecture. Journal of Mathematical Economics, 29(1), 57-66.
• Toyota. (2016). Electric Cars. Retrieved from https://www.toyota.co.uk/car-categories/electric-cars.json
• Vance, A. (2016). Elon Musk’s Wild Ride. Bloomberg Businessweek. Retrieved from
https://www.bloomberg.com/features/2016-elon-musk-companies/.
• Volkswagen. (2016). e-Golf. Retrieved from https://www.vw.com/models/e-golf.
• Volvo. (2016). Model line-up. Retrieved from http://www.volvocars.com/uk/cars/model-lineup.

19. APPENDICIES
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20. APPENDIX A
Comparison between Model S and Model 3
Specifications Model S (75 kW battery) Model 3
Price €91,688 €33,094 *
Reach 480 km 345 km
Performance 320 hp n/a
Top speed 210 km/h n/a
Acceleration (0-100 km/h) 5.8 sec < 6 sec
Length/Width/Height [cm] 498/196/145 468/189/144
*Based on EUR:USD exchange rate on 30 December 2016.Data from Tesla, 2016.
Photos from Motortrend, 2016.
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21. APPENDIX B
(EV Obsession, 2015.)
EMAIL BY TESLA TO RESERVATION HOLDERS
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