Automobile Industry

1. Automobile Industry By: Daniel, Deniz, Joseph, & Jeremy

2. Establishment & Practice of Standards in Fuel Economy U.S.A. & The C.A.F.E. Europe & Asia • 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.

3. MPG by Country

4. 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.

5. 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

6. 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.

8. Consumer preferences also increased the demand for SUV’s and light trucks, further decreasing overall fuel economy.

9. GAS TAXES http://www.youtube.com/watch?v=0fDzZaNAT8A

10. 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

11. Demand and Supply Analysis – Complementary Goods

12. Price Elasticity of Fuel

13. 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

14. 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

15. 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)

16. 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

17. 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

18. 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

19. Target Markets • “Generation Y” Americans • Regional Markets (e.g. fuel efficiency) • Social/Political Trends • Key Developing Markets

20. 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

21. 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

22. 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

23. 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

24. 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, PinelopiKoujianou. “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.