A 10 percent reduction in relative price would yield only one-tenth the market share impact of a restyling
Richmond, VA (Vocus) October 22, 2009
A failure to introduce new products at the same rate as foreign manufacturers explains the dwindling market share of United States auto companies, according to a new Virginia Commonwealth University study to be published in the Journal of Business Research.
"Non-Price Determinants of Automotive Demand: Restyling Matters Most," a study by three economists in the VCU School of Business, analyzed secular market share changes in the automobile and light truck submarkets. Their research revealed that new product, as measured by restyling, represents the dominant determinant of demand in the auto industry. Other factors, such as price, advertising, rebranding, warranty curtailments, new safety appliances and even changes in vehicle reliability, had minimal impact on demand.
"A 10 percent reduction in relative price would yield only one-tenth the market share impact of a restyling," said Oleg Korenok, assistant professor of economics at VCU and lead author of the study. "And one would have to double one's relative advertising expenditure to match the impact of a restyling."
Domestic automotive producers saw their market share fall from 72.9 percent in 1996 to 47.4 percent in 2008. Over the 1995-2006 model years, Japanese manufacturers restyled on average ever third year, while U.S. manufacturers restyled every four years.
Korenok and his co-authors, George Hoffer, professor of economics at VCU, and Edward Millner, professor and chair of the Department of Economics at VCU, argue that "this difference in styling (frequency) better explains the 25.5 percent market share loss for domestic manufacturers over this period than more often cited factors such as reliability differentials as cited by Consumer Reports."
"Japanese and Korean makes and to a lesser extent European brands have been much more aggressive in restyling and much more aggressive in introducing new products than the U.S. brands," said Hoffer, who has researched the auto industry for more than 40 years. "Interestingly, the current Detroit Three (General Motors, Ford and Chrysler) used more frequent restylings 50 years ago as a weapon to drive the post-war independent American manufacturers such as Hudson, Kaiser and Packard from the market."
The study authors say that increased fragmentation of the domestic automobile market and management misallocation of styling resources explain the failure of U.S. manufacturers to restyle more frequently. They said that the Detroit Three's best hope of regaining market share is to increase the level of restyling activity, especially for high-volume lines. Domestic manufacturers also should be reluctant to jettison established vehicle line names because rebranding has an adverse market share impact.
"Non-Price Determinants of Automotive Demand" has been published on the Journal of Business Research web site -- http://tinyurl.com/ojk5jh -- and will be published in a forthcoming issue.
About VCU and the VCU Medical Center: Virginia Commonwealth University is the largest university in Virginia with national and international rankings in sponsored research. Located on two downtown campuses in Richmond, VCU enrolls 32,000 students in 205 certificate and degree programs in the arts, sciences and humanities. Sixty-five of the programs are unique in Virginia, many of them crossing the disciplines of VCU's 15 schools and one college. MCV Hospitals and the health sciences schools of Virginia Commonwealth University compose the VCU Medical Center, one of the nation's leading academic medical centers. For more, see http://www.vcu.edu.
About the VCU School of Business: Located in Richmond, one of the nation's best places for business and careers (Forbes, 2008), the VCU School of Business offers a tradition of forward-thinking academic excellence and connection with businesses in our region and around the globe. For more, see http://www.business.vcu.edu.