This article reviews recent econometric literature on the functioning of the new automobile market. In this literature in-depth analyses of this market are provided that are based on relatively easily obtainable data and advanced econometric techniques. The market for new cars is modelled as an oligopoly with product differentiation. For the demand side of the market, discrete choice models are used that are sufficiently general for substitutions between makes of cars to be determined by the data. Suppliers are assumed to be profit maximisers and a Nash equilibrium is assumed to exist. When interpreting the market equilibrium the possibility that unobserved (by the researcher) quality aspects become important for price setting behaviour is something that is taken into account. Prices are the sum of marginal costs and a mark-up whose value depends on the price elasticity of demand. Applications of the new modelling technique are to be seen in Japan’s voluntary export restrictions, price dispersion in the European market and Chrysler’s introduction of the minivan. The sound economic basis of these models allows for a welfare-economic analysis of these phenomena. The new approach is, of course, not without its shortcomings. Two of them are, the ignorance surrounding the development of new models as an endogenous phenomenon and the relationship between the markets for new and used cars. Clearly not all has yet been said that needs to be said about the economic and econometric analysis of the car market. (Author/publisher)
Abstract