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AUTOMOBILE INDUSTRY By: Daniel, Deniz, Joseph, & Jeremy

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Automobile Industry. By: Daniel, Deniz, Joseph, & Jeremy. 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. - PowerPoint PPT Presentation

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Page 1: Automobile Industry

AUTOMOBILE INDUSTRY

By: Daniel, Deniz, Joseph, & Jeremy

Page 2: Automobile Industry

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

Page 3: Automobile Industry

MPG by Country

Page 4: Automobile Industry

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.

Page 5: Automobile Industry

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

Page 6: Automobile Industry

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.

Page 7: Automobile Industry
Page 8: Automobile Industry

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

Page 9: Automobile Industry

GAS TAXES

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

Page 10: Automobile Industry

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

Page 11: Automobile Industry

Demand and Supply Analysis – Complementary Goods

Page 12: Automobile Industry

Price Elasticity of Fuel

Page 13: Automobile Industry

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

Page 14: Automobile Industry

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

Page 15: Automobile Industry

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

Page 16: Automobile Industry

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

Page 17: Automobile Industry

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

Page 18: Automobile Industry

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

Page 19: Automobile Industry

Target Markets

“Generation Y” Americans

Regional Markets (e.g. fuel efficiency)

Social/Political Trends

Key Developing Markets

Page 20: Automobile Industry

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

Page 21: Automobile Industry

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

Page 22: Automobile Industry

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

Page 23: Automobile Industry

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

Page 24: Automobile Industry

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.