TITLE:
A Theoretical Model of Competitive Equilibria in the New Car Market
AUTHORS:
Rebecca Abraham, Mark W. Zikiye, Charles Harrington
KEYWORDS:
Monopolistic Competition, Utility Functions, Competitive Equilibrium, Consumer Preferences
JOURNAL NAME:
Theoretical Economics Letters,
Vol.5 No.2,
March
30,
2015
ABSTRACT: In the United States, the automobile purchase decision is consequential
for both households and car producers. In households, adults typically own
their own vehicles for personal use such as commuting to work or college. The
need for multiple, safe cars per household represent a significant allocation
of household income on an ongoing basis as old vehicles are replaced. Customer
needs are represented by groups of demand
utility functions which specify the demand for increasingly expensive
safety features and styling changes. Auto manufacturers respond to the need for
a variety of styles and safety features by producing vehicles in as many as 16
different product-market segments. They offer multiple financing options such
as leases, late models, and stretching out payments to accommodate capital
rationing by their customers. The quantity sold in each segment provides the
profit per segment which adds across segments to provide the overall profit for
the firm. This is a monopolistically competitive environment in which brand
loyalty drives sales per segment, with each segment being considerably
different from others in vehicle characteristics and customer income. This
paper theoretically develops the demand utility functions within each segment,
develops the producer’s profit function and then equates the supply and demand
functions to obtain the optimal quantity per segment. Practical implications
are discussed. One such implication is that the quantity of sales may not be
realized in any one market, so that sales may have to be realized across
markets for auto firms to achieve consistent, long-term profits. Thus, our
quantity specification may provide a justification for the globalization of the
auto industry.