Automobile Industry

The automobile industry is one of the most developing markets in the world. In the period between 2000 and 2012, 52 million cars were sold globally, while during 2015, this number was more than 72 million. Due to the globalization and increasing competition, automobile sales continue to grow fast. The growth occurs because of the professional work of auto specialists, such as designers, mechanics and others, who create brand new models of vehicles. This industry was chosen for the research, because it is an inherently interesting one: it is competitive, massive and is undergoing a considerable restructuring due to decreasing oil reserves and globalization. The sales are constantly growing, leading to the increase in employment. For instance, in the United States, over 7 million private sector jobs are supported by the automobile industry. There are several features associated with the automobile industry such as policies and regulations, pricing, marketing power, innovation and increased competition from other manufacturers and sellers. However, this paper will focus on discussing the pricing and innovations as the key components that influence the market power in the automobile industry. In addition, a specific attention will be paid to how different companies apply the pricing and innovations in order to increase their market powers. The results of other industries will also be compared using game theory models and other theories in order to show that the market power is highly significant in the automobile industry in terms of influencing producers and policymakers.

Literature Review

Soja Richard in the article “Automotive Security: From Standards to Implementation” discusses the specific measures that are necessary for securing microcontrollers of the cars. With the development of new technologies, microcontrollers and other electrical devices have appeared, contributing towards appearance of the need to secure them. The electronic devices, which were introduced in 1970, performed a single function in comparison to the complex electronic trip computer, which comprises of all the electronic systems of a car and is managed with a single button pressing. This embedded electronic system includes wireless communication devices, audio systems, and keyless entry. The electronic system contains a considerable amount of personal information, including the credit card details used to pay for gasoline, which robbers can steal with the car’s electronics. Just like the electronic system, the security one came through a long way of innovations. Starting with car alarms and keyless entry, the security system evolved to the full protection of personal information. However, these innovative features highly influence their pricing, thereby increasing the market power.

The article “Automotive revolution – perspective towards 2030” written by McKinsey and Company provides a discussion about the progressive technologies in the automobile sphere, which comprise of the autonomous driving, connectivity, diverse mobility, electrification. The paper emphasizes that all four trends fill each other in various ways. Nevertheless, it is clear that all of them are constantly evolving, pushing the other one to more prominent innovations. The innovators are sure that the development of these trends will make the automobile industry flourish and the sales will definitely grow, thereby determining the pricing strategy. The researchers plan to implement all the innovations till 2030 despite all challenges, resulting in citizens feeling themselves more comfortable on the roads while driving smart automobiles. These four innovations are revolutionizing and contribute towards increasing of the market power of the automobile industry.

Industry Background

The history of the USA automobile industry started in the 1890s. For almost one hundred years, the USA auto market was the largest, yielding to the Japanese and Chinese ones in the 1980s. The size of the US automobile industry was large, almost covering the global market. The key players in this industry included Volkswagen, Toyota, Mitsubishi, General Motors, Hyundai, BMW, Ford, Nissan, Fiat or Chrysler and Suzuki, among others. Ford, General Motors, and Fiat or Chrysler were based in Detroit, Michigan, which was the major automobile center of the USA and the world, as well. The automobile industry continues to exist as one of the most significant areas of the US economy. The industry managed to attract the foreign direct investment, which is currently valued at $74 billion, that is approximately 3 percent of all foreign direct investments in the United States.

Description and Economic Analysis: Industry Features

Pricing

The strategic pricing model is a tool for effectively gaining or loosing the market power in any economy. It is another major factor that establishes a competition in the market due to the fact that different manufacturers or sellers implement various pricing strategies. Furthermore, the ability of clients to buy at a particular price is determined by their income, willingness to pay and negotiation abilities. However, automobile manufacturers use the value-based pricing to fix prices in accordance with the buyers’ perceived value, rather than fixing it based on the cost of production. In a competitive marketplace, the effectiveness of any market mix is not only determined by its absolute value, but by its relative value based on the competition that exists. For instance, in case of the increasing demand, the effectiveness of a price cut is highly dependent on the competitors’ reaction to the change in price. In the automobile market, there is a routine introduction of new car models every year which reduces the value of the reaction coefficient in predicting a competitive response to demand. Moreover, the activity motivation refers to the fact that firms need both the ability and motivation in order to achieve the success in implementing an effective pricing strategy. However, by applying the game theory, it is possible to understand firms’ abilities and motivation in different segments of the market. As it is shown in fig. 1 below, any firm tends to sustain as a stable equilibrium, while the condition permits. This establishes the competition among automobile manufacturers, thereby influencing the market power. In addition, due to the concept of backward induction, firms tend to predict or follow some strategic actions of their competitors. Established firms can try to frustrate the competitors’ entry into the market by engaging in a costly promotion or price cutting campaign. As such, all classes of cars have their range of prices, and similar vehicles marketed to different buyers are priced differently. Therefore, pricing increases the industry’s market power and competition, as well.

Figure 1: The Games Tree

The aspect of security is one of the crucial components in producing of cars as well as driving them. Thus, firms compete in producing automobiles with better security systems. The more powerful the system of safety is installed in the car, the more value it possesses. Producing a worth secure complex, the company grows in the rates and increases its prices. Before realizing, the car overcomes the inner pre-realizing test, including crash-tests as well as evaluations of the safety of electrical system. In this regard, testers assess the sustainability of the components of the automobile, its security in terms of robbers, accordance of the introduced and implemented parameters in regard to the existing ones. The aspect of security impacts the automobile industry to a considerable degree as it is the chief trend in producing the machine. The global firms are struggling to make the security of their autos better in order to protect passengers and drivers.

The IO models influence the industry’s global positioning in terms of the pricing strategy. The external environment has a substantial impact on the pricing of automobiles. In this sense, there are the competitive firms, which struggle to do their best in terms of the car production. The innovative technologies and progress demand the production of a high class model range to satisfy customers’ needs. Therefore, in trying to position themselves, they will be ready to place more affordable price tags on their automobiles

Nonetheless, it is essential to develop a more flexible and effective pricing strategy to produce highly effective cars that are affordable and can compete with the same of other manufacturers. In terms of such approach, a company can achieve the overall domination in the market, while also gaining more market power even outside the US. In order to achieve this, it is crucial to conduct a SWOT analysis to identify all the strengths and discover the respective opportunities.

Innovation

The aspect of innovation comprises of autonomous driving, connectivity, electrification, and diverse mobility. These trends connect to operate together in achieving the appearance of a super car. The autonomy and connectivity in a self-driving automobile allow passengers and drivers to use the time during driving for their personal needs. The manufacturing of electricity also helps in reducing of the dangerous emissions of the fuel usage, making the automobile more economical and ecological, as well. The innovation makes cars become more mobile and able to overcome narrow, winding and other types of roads. Moreover, automotive cars decrease the occurrence of traffic accidents.

The innovation is one of the most significant factors in the automobile industry as it increases the market power of automobiles. New technologies are progressing in the auto world, making companies create modern tools to compete with other firms. For example, the innovations in electric cars that have appeared just recently lead to the majority of manufacturers struggling to produce more economical cars that drive with the help of alternative sources of energy. The impact of innovation aspect is crucial in regard to the whole automobile industry as it requires the competence among firms in terms of producing the innovation technologies, which run all the spheres comprising of vehicles. This helps in increasing the market power of the industry. One major driving force of the innovation in the USA automobile industry is the competition from the Asian automobile manufacturers. In order to compete with other manufacturers, the USA firms must work harder, thereby increasing their competence in the industry.

The IO models influence the aspect of innovation to a considerable degree. The external environment is the main source of challenge for the USA auto market. The outer environment means the progressing Asian countries, which are constantly evolving and make a healthy competence for the USA vehicle industry. The external IO models require the firm’s competiveness and skills of their workers. In analyzing the aspect, a special attention must be paid to the external environment. The outer globe surrounding the aspect of innovation makes firms compete in terms of producing the most innovative automobiles ever. The assets are usually paid off, and excellent skills of workers result in the outcomes. The skills of creating, constructing, and testing are particularly aiding. With the aim of producing the most innovative vehicles, companies utilize the skills of professionals in mechanizing, constructing and auto researching. However, in addition to innovative business strategies, it is essential to move the company towards fully automated production facilities with the purpose of reducing the labor cost and increasing the production efficiency. In this regard, it requires a constant development of skills, while acquiring more resources for the increased productivity.

Conclusion

The USA automobile industry is struggling hard to evolve and compete with others to be on the top of the world. The most prominent aspects of this industry are the pricing strategies and innovations among others. These factors determine the market power of the industry, because they influence marketability and productivity to a considerable degree, which can be illustrated using the game theory and IO models. Thus, automobile companies must work efficiently to improve their vehicles constantly and remain competitive in this sphere. However, due to the rapid grow of the automobile industry, its market power is high, thereby significantly influencing producers and policymakers.