Q5. Please answer all the questions so that I can verify with my own, thank you
ID: 1131959 • Letter: Q
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Q5. Please answer all the questions so that I can verify with my own, thank you so much!
5. Recall the table from class with estimated vehicle mark ups by location in which they are sold. Note: Table 11: Weighted average markups of firms across markets (percent) BRA BEL CAN DEU ESP FRA GBR ITA USA 9.2 7.2 9.5 8.4 11.8 7.4 Fiat Ford GM PSA Toyota VW 7.6 85 6.3 8.5 9.0 8.4 7.5 9.2 9.4 8.5 10.0 6.6 8.9 9.5 8.6 7.6 9.4 9.3 8.7 113 .0 9.7 6.1 8.2 9.9 8.1 7.0 8.9 8.1 8.2 9.6 7.5 9.7 8.5 108 8.6 9.8 9.5 8.6 9.2 8.4 8.2 12.4 8.78.7 Figure 1: Source: Cosar K., P. Grieco, S. Li, and F. Tintelnot (2018). What Drives Home Market Advantage? Journal of International Economics 110, 135 - 150 2 There is room for creativity here, and I expect answer quality will improve with discus- sion. (a) Find at least two general patterns that appear to hold from the table above. Points we made in class are fine (b) Assume each firm acts like a monopolist. Informally propose two rationales to explain each of the mark up patterns you identified (total of 4). Hint: If you note that Brazilians pay a lower marlk up and the proposed rationale is "Carnaval" expenses, you should explain how that impacts some term in the elasticity rule. Hint 2: Do not propose "Carnaval" expenses. (c) Finally, sketch out what data you would like to help determine which of those two rationale is more important in driving the observed patternExplanation / Answer
a) One general pattern that can be observed from the above table is that all the car brands have the highest price markups in the country in which they are manufactured. For instance, Fiat, being an Italian car brand, has the highest markup in Italy, Ford has the highest markup in USA and so on.
Another general pattern observed is that a poorer ( developing country) like Brazil has a lower markup compared to the richer countries.
b) Since the automobile manufacturers behave like monopolists, they are practising price discrimination between the countries, offering higher price markups in countries having higher demand for automobiles of the particular brand.
It is possible that countries where a particular brand is manufactured may have a higher demand for that particular brand. For instance, Americans may prefer and American brand like Ford over a French brand like PSA. Therefore, the brands charge a higher markup in their home countries as people are willing to pay higher prices for their home brands. This may be the rationale behind the first pattern we observed in a).
It can also be the case that poorer countries like Brazil has fewer takers for all automobiles regardless of the brand since people have lower purchasing power and may not be able to afford the vehicles priced too high. Therefore, by offering lower markups, the brands want to sell more in poorer countries so as to maximize their profits. This is the rationale behind the second observed pattern in a).
c) In order to determine which of the two rationales is more important in driving the observed patterns, we require data on the total demand for automobiles in different countries and the segregated demand for automobiles of different brands in different countries. From this data we can see if people have a preference for home brands over foreign brands. We also require the income levels of countries to see if income has an effect on demand and markups .
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