The Study of Price War of Automobile Industry in China

THE STUDY OF PRICE WAR OF AUTOMOBILE INDUSTRY IN CHINA

Name: Xiaolei Zhang

UIN: 659919249

Abstract

This paper is from the perspective of the price war of Chinese automobile industry, explain the inner reason of the automobile manufactures cutting price against each other, and give some suggestions to the automobile industry by combining the actual situation.

Keyword price war, automobile industry, game theory.

1. Introduction

Since1953 the first automobile manufactory was built, Chinese automobile industry has developed for more than half century. Automobile industry went through from the naïve stage to the full-development stage. From the foundation of China to the period of planned economy, the production capacity of automobile industry was very low, and the kind of product is also very single, the production is not unified and the benefit of economies of scale is poor. But with the promotion of reform and open, rapid increase of economy and resident's income, the automobile industry develop vigorously. The previous experience shows that the level of average income has the positive link with the popularity rate of automobile. And Chinese government took some measures to encourage the automobile industry, and there are several automobile production bases, and the competitive structure has been formed.

According to the statistic data of China Automobile Association in 2004, from January to October, the production yield of automobile are 4.23 million, compare with the same period in 2003, the yield increase by 17.58%, and the selling yield was 4.13 million, in 2006, China over Germany has already been to the third biggest automobile manufacture country in the world. But comparing with the other automobile manufacture country, there is still an obvious gap in Chinese automobile industry. First, the production scale is relatively small though there are a mount of manufactures, this is not consistent with the development rule of automobile industry. For instance, there are more than 120 auto manufactures in China, but the total year yield of the whole industry is less than a big manufacture in USA. Second, both the cost and price is much higher than other country for the same kind of product. Third, comparing with other big automobile manufactures in the world, the production concentration is much lower. The automobile industry should be one of the most notable economies of scale industries.

Graph1-Comparation of automobile production concentration

China USA Japan Korean

CR3 41.7 98.9 63.1 97.1

HHI 902 3676 1771 3435

<China Economy Statistical Yearbook>, 1998, Page 253

2. The feature of market competition and analysis of causes

Although Chinese automobile industry develop rapidly, it still can not withstand the challenge from the foreign automobile industries, especially after joining the WTO, the tariff decline year by year, which lead to the great impact to the automobile industry, so cutting price becomes the only way for the manufactures of automobile industry. In 2008, the average selling price of automobile dropped by 20%. There are some features for cutting price: the range of cutting price is large, the frequency of cutting price is high regardless of seasons; brand manufactures lead to the price war; the influence of cutting price is weaker after each time; cutting price don't bring the increase of sales as expected.

Price is the core of market mechanism, price competition is the basic measure of market competition, and enough market competition is the prerequisite of exertion of market regulatory function. Though the ways of competition are various, price is the primary means of competition. It has been proved that during the critical period of economic system reform, price competition plays an important role in promoting the process of marketing which is an important sign for perfection of market economy. Besides, price competition has positive impact on breaking the monopoly and improving the internal quality of enterprises.

Price competition is the core means of market competition mechanism, so the pricing strategy becomes the primary strategy of competition among enterprises. Cutting price for promotion becomes a common used price measures. But if exceeding a reasonable limitation, it will gradually become to an excessive price competition or dumping for capturing market share, thus, it will bring a malignant price war which is detrimental to the long-period development of the industry.

Not all the industry have price competition, some industry have high probability to have price competition, while some are not. Price competition is an important process for a naïve industry to be mature. The safe coefficient of an industry will be very high if price competition is replaced by brand competition, technology competition, service competition and quality competition. In China, there still several industry in a naïve or growth stage. The competition among enterprises is so serious that it's easy for price competition or even price war happen. And usually these industries possess the following features: obtaining huge profits, high price elasticity, overproduction, overstocking.

The price competition is the result of non-cooperation game competition among enterprises within an industry. The price war breaks out due to lacking a special mechanism to manage the price behavior of enterprises. And the price war may become more and more serious.

To deeply analyze the cutting price behavior of automobile industry, this paper takes price competition between BMW and Benz as example, from the prospective of static and dynamic game theory to investigate strategies they choose under different conditions.

3. Model

(1)Static Game Model.

During the process of setting price, at first there usually a typical non-cooperation game relationship between automobile enterprises. The basic rule for this game is to pursue the maximization of profits. In the automobile market of China, there are some oligopoly firm leaders, and a group of small manufacture followers. Here we take the price competition of BMW and Benz as example. Both BMW