Price Differentials in Chinese Automobile Industry (Dissertation Review Sample)

Topic: Price Differential in Chinese Automobile Industry across Different Cities
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Literature Review
The information from government agencies in China indicate of big price disparities in automotive industry. Evaluations by different scholars indicate that one of the causes of large price differentiation is market segmentation. Yu, Lu and Luo, (2013) obtained data regarding the price differential in Chinese car industry from the China Information Network (CPIN), which is a subsidiary of the National Development and Reform Commission (NDRC). The agency keeps record of monthly sales in 36 large cities in China. The agency records the price, car model and manufacturer. The China Auto Circulation Association (CACA) keeps the record for quarterly sales of cars in China cities. According to Yu, Lu and Luo, (2013), coefficient of variation is used in measuring price dispersion across different cities in China. Moreover, Yu used Goldberg and Verboven model in calculating the hedonic prices for every city at certain time. This enables them to obtain the prices of different car models in each city at a particular time.
The research by Yu, Lu and Luo indicates of increasing price dispersion of passenger cars in China cities (Yu, Lu & Luo, 2013). According to Yu, Lu and Luo, (2013), from 2004 to 2006, there was consistent increase in the price differentiation across different cities in China. One of the effects of price differentiation is income effect. The income effect largely accounts for regional price disparity in China. This is because of income inequality that exists across Chinese cities resulting to inequality in car sales across the cities.
Moreover, in an evaluation of the causes of price differentiations in Chinese car industry, Lee and Hong (2012) found that various factors result to price differentials. Lee and Hong (2012) found that market segmentation in China is a cause for price disparity. This is similar to causes of price disparity in automotive industry in Europe as found out by Goldberg and Verboven. In this case, market segmentation empowers market forces of demand and supply to control prices, in the market. Therefore, since the market forces vary from one city to another, in China, this leads to price variations across the cities. Pride and Ferrell (2012), state that in an oligopolistic market, the demand curve within a specific region is affected by the income and consumers preference in the region. Conversely, the input costs and optimal output strategies have effects to the supply curve in the region. Furthermore, the competitors’ strategies and output level have significant effects to the supply curve. In this context, the Chinese automotive industry is an oligopolistic market. The automotive industry has been segmented into regions and thus car prices vary from one region to another. According to Lee and Hong (2012), many Chinese car manufacturers sell their products across the country. Therefore, the car manufacturers try to maximize returns from each of the segmented regions. This leads to variations in prices across regions as companies try to maximize revenues.
Maxcy (2013), states that in the global automotive industry, cars are almost identical. In this context, the make of different cars is similar due to standardization process. The difference between cars occurs in the marketing since they are sold in different brands. The brands bring differences in prices and external appearance of the vehicle. Therefore, consumers purchase identical cars with different brands names. Maxcy (2013) depict that this practice of identical cars and different brand names is called ‘badge engineering.’ One car manufacturing company can source for a specific car model from competitor company and makes minor changes to suit the company’s desires. Thus, the company does not invest heavily in research and development of a new in-house model. The two cars in the market share many common features regardless of difference in brand and physical appearance. Moreover, when the two cars meet in the market, they have different prices. The pricing of the vehicles is based on the external appearance and brand name. In turn, this leads to variation in prices between the cars despite the cars sharing many similarities. According to Maxcy (2013), in certain circumstances, cars are manufactured in the same industry and undergo the same production lines despite having different brand names. In this case, the brand name brings variation in price. Therefore, consumers purchase identical cars at different prices in the market.
Apart from China, there are other countries and regions that have experienced price disparities in the automotive industry. The European region is one of the regions with huge price disparities, in the automotive industry. The price disparities in the Europe region began as early as 1980s. According to Lumley (2009), an evaluation of price disparity in automotive industry, in the Europe region, reveals of information that was recorded in 1981 and 1986. The Bureau of European Consumers Unions (BECU) started keeping the records of price disparity since 1980s. Lumley (2009) states that in the European region, the disparity price differed by more than 50% across European countries. In the European region, the first source of price disparity was due to price discrimination. There was price discrimination by different automotive companies especially global leading companies. The price discrimination is due to difference in demand elasticity across different countries.
Maxcy (2013) did a research to evaluate the causes of price disparity across different markets in Europe. Gual divided the market into oligopolistic markets and did a regression analysis of the data collected from oligopolistic markets. The results of the research study indicated that monopoly of some markets by large global companies in automotive industry resulted to price disparity. This is because monopoly companies charged high prices in monopoly markets in relation to prices charged for similar products in other markets. Furthermore, additional costs lead to price discrimination and price disparity in different markets. In this context, countries where car manufacturing companies are located have low car prices as compared to importing countries. This is because of freight charges to transport cars to foreign markets. However, car marketers and sellers take advantage of freight charges to optimize their net profit. Therefore, in countries where markets are segmented, consumers purchase similar cars at different prices from different market segments. Maxcy (2013) also found out that taxes have significant effects to price discrimination and disparity. This is because high tax countries have low pre-tax prices as compared to low-tax countries. Therefore, price discrimination is high in low-tax countries causing price differentials across different countries in the European regions.
According to Lumley (2009), an evaluation on price differential before taxation and after taxation revealed of existence of price disparity in the two cases. However, the price disparity was higher before tax adjustment as compared to after taxation. This is because taxes increased the retailing price for cars even in countries with low price disparity. Moreover, due to lack of uniform taxation system in many regions such as Europe and American regions, prices after taxation showed existence of price disparities in different countries. Lumley (2009) found in his research that the number of dealers within a segmented market had significant effect to price differentials for automotive. The markets with few car dealers experienced high prices of vehicles as compared to markets with many car dealers. This is similar to oligopoly markets where few companies control market activities. In oligopoly markets, few large companies can collude to determine the prices in the market (Pride & Ferrell, 2012; Pride, et al. 2012). Furthermore, prices are sticky in oligopoly markets since the few companies in the market are not likely to change prices due to competition. In this case, markets with many car dealers have volatile prices since dealers compete through price. Therefore, cars with many car dealers experience high price differentials.
In the European countries, the price disparities were also significant in countries experiencing high inflation rate and depreciation in currency. According to Pride and Ferrell (2012), discounts from selling companies and other financial benefits have significant effect to price disparities in the automotive industry. This makes people from different areas to purchase similar vehicles at different prices. In the European region, UK was found to have the highest prices and Belgium had the lowest price of cars. The low priced vehicles had the largest price differential such as Peugeot, Volkswagen, rover and ford among others as compared to high priced vehicles such as Mercedes-Benzes.
Pride and Ferrell (2012) found in his research big price disparity for various models of vehicles in different countries. One of the outstanding disparities was in Aston Martin Cygnet, a tiny European city car. The car retailed at a price of $45,000 (Pride & Ferrell, 2012). However, the Aston Martin Cygnet car is manufactured by Toyota Company, which is one of the leading automotive manufacturing companies. An identical car from Toyota Company was retailing at a price of $17,000. The difference between the two car models was outside appearance and minimal internal hardware. The price disparity between the two car models is $28,000. Therefore, a consumer purchasing Aston Martin Cygnet car pays an outrageous extra double price despite the two cars being manufactured by the same company and undergoing through the same produ...