The data in the table below roughly describes market shares of firms selling car

Question

The data in the table below roughly describes market shares of firms selling cars in the U.S. market.

Would you characterize the auto industry as described by this data as being competitive? Explain why or why not based on the characteristics of the auto industry. Please think in terms of price, number of firms, product differentiation, industry concentration, ease of entry/exit, cost structure, demand—both quantity demanded and drivers/causation, and any other factors you deem relevant. A good approach here is to think about what competitive means in terms of the structure of the market and that environment facing producers. Assuming that we are all reasonably familiar with the automobile industry—just what we read in the papers and/or have absorbed over the years, there should be absolutely no need to perform any research on-line; rather, this question is focused on concepts of competition, monopolistic competition, oligopoly, and monopoly.

General Motors 23% Ford 19% Toyota 14% Chrysler 7% Honda 10% Nissan 9% Hyuandai 5% Kia 5% Subaru 4% Volkswagen 4%

Explanation / Answer

The auto industry, by the given data is neither perfectly competitive nor monopoly, it can be called to be a monopolistic market or competitive. Like a perfectly competitive market system, there are numerous competitors in the market as we can see from the table above but the product is differentiated from each other. Product differentiation is one of the key elements of competitive market, as though the firm sell cars only yet the products are different from each other. The where firms use size, design, colour, shape, performance, and features to make their products different, that is that the cars are different from each other in design and can easily be differentiated by the make. The firm also use different techniques to market themselves. These Firms operating under monopolistic competition usually have to engage in advertising. Firms are often in fierce competition with other firms offering a similar car, and the firms need to advertise on a local basis, to let customers know their differences. Common methods of advertising for these firms are through local press and radio, local cinema, posters, leaflets and special promotions.

Knowledge is widely spread between both the seller and the buyer, but it is unlikely to be perfect. For example, buyer can review all the cars available in the town, before they make their choice. Once they have decided to buy the car, they still have a choice of rethink about their options. The decision of the buyer is final only when the purchase is complete. The firms have free entry and exit in the market. The firms continue to exist in the market as long as they are making profit, sometimes they even try to revive themselves in zero profit. In the long run the firms have no barriers to enter or exit the market.

Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production. Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to ‘take' it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. Though they are competitive while pricing their products but are not affected by each other’s judgement, instead the pricing is done on the basis of the features each of the cars is providing and that makes it different form the rest of the car that are available in the market. The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making.

In the market like stated in the example above, we can see that the demand is only a half way process, with different kinds of cars to choose from, from the products available the demand is based on the individual choice of the customer. In such a market the customers are the price takers but they still have lots of options to choose from.

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