MARKET STRUCTURE

Market Structure of European Automobile-industry

Market Structure of European Automobile-industry

Part A: What is market Concentrationand UK Automobile Industry

The market structure of the UK automobile industry is based on Oligopoly. An oligopolistic market consists of only a few producers. Furthermore, entry by new firms into the market is impeded; consequently, firms in an oligopolistic industry can earn substantial economic profits over the long run.

In some industries, it makes sense to think of firms choosing the price of their output and then selling as much as they can at that price. If they can easily produce an additional unit of output, firms will compete with each other based on price. Examples include the computer software, video games, and insurance industries. However, in other industries, firms have to choose their production capacity in advance, and quantity cannot be changed quickly or easily. Firms in these industries choose quantity with price adjusting to clear the market. Such industries include steel, automobiles, and passenger aircraft. As we will see, choosing prices instead of choosing quantities leads to a different oligopoly equilibrium.

Another consideration is how oligopolists interact in their attempts to maximize profits. Perhaps they collude with each other, working to maximize joint profits and dividing up the market. If firms can see the “big picture,” they will realize that collusion is more profitable in the long run than competing with and undercutting each other. However, any collusive agreement faces two types of problems. First, each individual firm is tempted to cheat on the agreement to increase its short-run profits. And second, firms have to pay attention to the relevant law. In the United States, it is illegal to write a contract to keep prices high. Consequently, collusive, joint-profit-maximizing agreements are more stable in some industries than in others, depending on how easy it is to reach an agreement without overt collusion and how quickly a firm can increase output if it tries

Sometimes oligopoly firms must choose their strategies simultaneously or at least close enough together in time that they are deciding without knowing their competitors' decisions. For example, Sears and Best Buy choose prices for flat-screen TVs without knowing what price the other store has chosen that day. Coca-Cola and Pepsi decide on new advertising campaigns without seeing each other's plans. However, in some situations, one firm acts first, and then other firms decide how to respond. Sequential business decisions include entry decisions in which potential competitors must decide whether to enter a particular market and bargaining decisions such as those in which a firm negotiates with its suppliers over prices. In modeling oligopoly behavior, it is important to think about whether the particular interaction is better thought of as simultaneous or sequential.

To think about market price and output in an oligopoly, we must first consider what an equilibrium would look like when firms are explicitly taking each other's behavior into consideration. The principle used in many models of oligopoly behavior is the Nash equilibrium, named in honor of the mathematician John Nash who developed ...