Competition and product survival in the UK car market

Abstract

The paper examines the extent to which inter- and intra-firm competition influenced the survival of cars in the UK market between 1971 and 1998. It is shown that, while competition influenced product survival in all market segments within the UK car market, the nature of that competition differed between them. In the small family and large family car segments, intra-firm competition dominated inter-firm competition. In contrast, in the luxury/sports car segment only inter-firm competition conditions resulted in product survival. Evidence was also found that the luxury/sports car segment has grown more competitive over time and that firms marketing products in the family car segments have become considerably more successful at avoiding the effects of intra-firm competition.

Acknowledgements

Francisco Requena would like to thank Generalitat Valenciana (GRUPOS03/151 and GV04B-070) for financially supporting this research.

Notes

¹ The issue of product survival in multiple product markets is of course relevant to a wide selection of industries but is of particular importance in the car industry where the sunk cost associated with designing and producing a new car model is considerable, both in terms of time and cost, with an average period of more than five years before being launched (Clark and Fujimoto, 1991).

² Various examples from an extensive literature include Mata and Portugal (1994), Mata et al. (1995), Agarwall and Gort (1996) and Van Kranenburg et al. (2002).

³ A third paper, by Asplund and Sandin (1999), also examines the exit of products in a differentiated product market, the Swedish beer market between 1989 and 1995, but those authors did not assess competitive effects.

⁴ 4-by-4s and people carriers are excluded from the analysis due to the low number of exits in those submarkets reflecting their late appearance in the market. The establishment of 4-by-4s as a recognized segment, rather than a residual of the market represented by a single model, began with the arrival of the Toyota Landcruiser in 1981. The development of people carriers represented the redevelopment of an obsolete concept that was relaunched into the UK market in 1984. In both segments profusions of models was not immediate, occurring in the mid-1990s, hence the low number of exits associated with them. These two segments represented less than 9% of the unit sales in 1998. The remaining models are classified by segment [small family, large family, luxury/sport] according to the trade publications, Motorists’ Guide to New and Used Car Prices and Parkers’ Guide to New and Used Car Prices.

⁵ All analysis is performed using STATA 8.0, which allows for a likelihood-ratio test of the null hypothesis that the variance (unobserved heterogeneity term) is zero. See Gutierrez (2002) for more details.