AUTOMOBILE INDUSTRY By: Daniel, Deniz, Joseph, & Jeremy.
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Transcript of AUTOMOBILE INDUSTRY By: Daniel, Deniz, Joseph, & Jeremy.
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AUTOMOBILE INDUSTRY
By: Daniel, Deniz, Joseph, & Jeremy
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Establishment & Practice of Standards in Fuel Economy
Corporate Average Fuel Economy (CAFE) established in 1975 to reduce U.S.’s reliance and consumption of foreign oil. Expected to meet standards
of a “sales-weighted” average of 18 mpg. Rose to 25 mpg by 2008.
Obama Administration expected to tighten the standards from 2011-2016.
In Europe, average new vehicle’s fuel economy is hopeful to reach 45 mpg. By 2012. Reason: tighter standards are
easier to meet in Europe. China set standards by
weight, rather than average fleet-wide measurments.
Japan separates requirement for diesel and gas, as well as weight class.
U.S.A. & The C.A.F.E. Europe & Asia
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MPG by Country
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The Operation of the Standards & Their Effects on
the Economy The National Traffic Highway Safety
Administration (NHSTA) regulates fuel economy standards, while the Environmental Protection Agency regulates CO2 emissions.
Firms must use strategic pricing and consider the behavior of their competitors.
Firms must raise their fleet-average mpg in order too meet the minimum requirements of the standard. The methods used to achieve this may include
the alteration of vehicle characteristics and price changes.
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The Effects of the Standards on Consumers & Suppliers
Fuel economy standards only apply to the new vehicles in the market. So does fuel economy really change much, since
all of the older (less fuel efficient) models are still in the market?
Fuel economy increases slowly for a period of about fifteen years, as the new vehicles full integrate into the market and the older models are “weeded out.”
“Rebound Effect”: Increased fuel economy encourages consumers to drive more
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Impact on the Auto Industry
Manufacturers have devoted much effort since the late 1980’s to developing larger vehicles with more horsepower, rather than improving fuel economy. The key focus was to satisfy efficiency, but not
economy. This meant that larger and more powerful vehicles could still meet the CAFE requirements.
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Consumer preferences also increased the demand for SUV’s and light trucks, further decreasing overall fuel economy.
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GAS TAXES
http://www.youtube.com/watch?v=0fDzZaNAT8A
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Gas Taxes: excise taxes imposed on the sale of fuel.
Complementary Goods: goods that are used in conjunction with other goods
Predicted Effect on the Automobile Industry
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Demand and Supply Analysis – Complementary Goods
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Price Elasticity of Fuel
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Congestion Pricing
What is Congestion and why is it a problem?
One way to reduce excessive congestion is through road pricing strategies.
What will this accomplish? Manage Demand Generate Revenue
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Understanding Models of Traffic Flow
Basic Speed Flow Models Assumes uniform traffic flow without traffic
jams Density and Speed graph Density and Volume graph
Bottleneck Model Many broad applications Commonly used to describe a specific
condition that impedes traffic
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Effects of Road Pricing Where has this been implemented before?
Negative Externalities Marginal Social Cost vs. Marginal Private Cost Pigouvian Tax
Comes in many different forms What are the difficulties with this fee? (VOT)
Country Type of Pricing
Measured Impacts
Net Revenues
Stockholm, Sweden
Congestion Tax; Cordon
20% reduction in traffic congestion
530 million SEK,$74 million
London, UK Congestion Charge; Area pricing
25% reduction in traffic congestion
£137 million,$222 million
Singapore Electronic Road Pricing; Cordon
Reached ideal free-flow speed
SGD $100 million,$72 million
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Issues to Consider When Designing Congestion Tolls
Uniform tolls maximize welfare gain Network effects Converting HOV lanes into HOT lanes Congestion is dependent on many factors Using the generated revenue in a socially
productive way Increase efficiency by varying the type of
toll
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Implementing a Road Pricing Scheme
Any policy must be implemented at the local level
Public approval will be dependent on what the revenue is used for
Need trials to gauge the exact effectiveness of any toll
Need flexibility of the system and communication between the localities of implementation
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Product Differentiation
Process of distinguishing a product from others, typically to make it more attractive to a target market
Importance of buyers’ perceived value Differences in quality, differences in
functional features, design, availability, promotion
Intent is to make it about more than price
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Target Markets
“Generation Y” Americans
Regional Markets (e.g. fuel efficiency)
Social/Political Trends
Key Developing Markets
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Role of Technology
“Innovation strategy” 4-Wheel Drive (ex. Honda) Complement to Social and
Political trends (e.g. innovative fuel)
Increased safety standards Pragmatic side of
technology- return of small automobiles
Potential consumer advantage, margin shrinkage
Accelerated product development
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Quality
Increase leads to higher standards
Change in focus on differentiating features (shift to stylish and experiential features)
Differentiation aimed at high-end consumers affects entire market
Technology allows high-quality in timely manner
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Competitive Strategy
Diversity of Products (imperfect competition)
Willingness to limit supply
Focus shifts from price to actual experience of buying and maintaining automobile (e.g. Mercedes-Benz free roadside assistance)
“No perceived substitute”
Long-term relationship with suppliers and consumers
P = Dsubstitute
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The Price of Product Differentiation
Creation of “concentrated markets”
Demand for rapid style and technology changes
Barriers to entry Stylistic changes
possibly leading to vertical integration
Debate as to validity, possible antitrust action
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Works Cited Anderson, Soren T., W.H. Parry, Ian, Sallee, James M., Fischer, Carolyn.
“Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives.” Review of Environmental Economics and Policy: vol. 5 (2007), pp. 89-108.
Danielle, L .“Taxing Black Gold.” Penguin (2003). Goldberg, Pinelopi Koujianou. “Product Differentiation and Oligopoly in
International Markets: The Case of the U.S. Automobile Industry.” Econometrica , Vol. 63, No. 4 (Jul., 1995), pp. 891-951.
H. Paul Root. “Should Product Differentiation Be Restricted?” Journal of Marketing , Vol. 36, No. 3 (Jul., 1972), pp. 3-9.
Herbert K. Tay, (2003) "Achieving Competitive Differentiation: The Challenge for Automakers.” Strategy & Leadership, Vol. 31 Iss: 4, pp. 23-30.
http://www.international.fhwa.dot.gov/pubs/roadpricing/roadpricing.pdf http://www.internationaltransportforum.org/jtrc/CongestionSummary.pdf Mcardle, M. “Who Will Reap the Benefits of a Gas Tax Holiday?” The Atlantic:
(2008). Parry IW. Pricing Urban Congestion*.(Report). Annual review of resource
economics. 2009- 01-01;1:461. Turrentine, Thomas S., Kurani, Kenneth S. “Car Buyers and Fuel Economy?”
Energy Policy (2007): 35, pp. 1213-1223. William, J. (1991). “Fuel Tax Implications for our Nation”, Oxford University
Press. Oxford.