Competition in the Auto Industry

Competition in the Auto Industry

Theme II

GBA 300

Professor Laura Wolff

Autos Team #3

Rachel Richardson

October 20, 2005

Introduction

As a staff member in a major consulting firm, I have noticed several

issues affecting competition in the automobile industry. The major

competitors of the industry, as well as their market shares, have greatly

affected the increased amount of competition in this industry. These

competitors include General Motors, Toyota, Ford, Honda, Nissan, Hyundai,

and Daimler/Chrysler. An oligopoly form of competition has taken place

in the automobile industry; several forms of competition have also

taken position, including price competition, product differentiation and

price discrimination. Several issues have also affected the

competition in the automobile industry. The move for automobile manufacturers to

more fuel-efficient, or hybrid vehicles and the promise of new markets

are two issues I will address regarding competition in the auto

industry. Research for these competitive issues can be found in areas such as

The Wall Street Journal, EBSCO and ProQuest. As each issue is !

addressed, we can take a closer look at how competition has

significantly affected the automobile industry in the present, as well as the

years to come. A brief description of the market, forms of competition

and current issues are summarized below. Competition changes because

these factors have greatly influenced the automobile industry.

Description of Market

Helping firms stay up to date with new product features and

innovations, competition exists in every industry. How each firm reacts to

competitiveness in their industry is closely related to the market share of

each industry. Several of the major competitors include GM, Ford,

Toyota, Volkswagen, Honda and Hyundai in the automobile industry. GM

accounts for 25% of the total US market share, while Toyota is the next

leader, with 14.7% of the market share. Ford comes in next with 13.6% of

the total market share, followed by Honda, with 11.2% of the share. A

more thorough description of all major market shares can be found in the

Appendix, in Figure 1. Japanese auto manufacturers, including Toyota,

Honda and Nissan, account for 39.3% of the total market share here in

the U.S, while all other foreign manufacturers can only account for

15.9%. However, U.S. auto manufacturers account for 44.8% of the total

market share (Bossong-Martinez, 5). In a recent survey, Toyota was r!

ated the best in overall buyer satisfaction, while Honda was the

overall winner altogether; General Motors was rated as the number one U.S.

automaker (Lenniman, 1).

New customers and competitors are present everywhere in the auto

industry. With a small number of firms and few large sellers, competition

becomes aggressive in this industry as manufacturers compete by reacting

to each other?s price and quantity changes. Each automobile

manufacturer is selling similar, branded autos, but the industry still struggles

to predict the reaction their rival firms (Miller, 620). Barriers to

entry, including government regulations, pricing, customer loyalty and

research and development, have allowed this industry to become overly

competitive; legal barriers, patents and control over supplies are all

factors that present barriers to entry in the auto industry. The

concentration in the auto industry depends solely on the percentage of total

sales by the leaders of the industry. As shown in Figure 2, the leaders

in annual sales are GM, Toyota, Ford and Honda (Bossong-Martinez).

These manufacturers account for over half of the sales in the U.S. m!

arket, with a high concentration ratio of 51%. With this description

of the automobile market, we can see how few large firms gain the most

market share by aggressive competition.

Forms of Competition

Competition in an oligopolistic industry affects the consumer as well

as the manufacturer and their competitors. Price competition greatly

affects the auto industry; each major industry knows how the others will

set their prices and in reaction to this, set their own prices and

quantities. They collaborate in order to charge competing prices and raise

profits (Bossong-Martinez, 603. However, by offering