Pricing Behavior in the American Automobile Industry, 1957-71

Abstract

OLIGOPOLY pricing models, from the simplified form of administered pricing behavior suggested by Lanzilotti, Means, and others' to more sophisticated forms of the game-theoretic type, have had limited success. The former are not easily reconciled with basic price theory and the latter are not readily susceptible to empirical verification. In contrast, models based on joint profit maximization tend to be more consistent with received theory and, at least in the case of price leadership models, descriptively accurate; however, such models are infrequently subjected to extensive testing. In this article we formulate and test a more general variant of the collusive price leadership model. Our model complements other models ofjoint profit maximization and is consistent with evidence from the American automobile industry during I957-7I. While our tests pertain to only this one industry, the model appears applicable to most industries characterized by fewness of sellers and product heterogeneity. In section II of this article we present our model of pricing behavior. The third section confronts this model with evidence from the automobile industry for I957-7I while the fourth section considers an alternative model, namely, perfect competition. Finally, we summarize our findings and offer