Product quality, product price, and share dynamics in the German compact car market

Abstract

The present paper examines one of the central elements of evolutionary thinking – the replicator dynamics mechanism. Using data on product characteristics of automobiles sold on the German domestic market over the period 2001-2006, we construct a fitness variable for each car model applying non-parametric efficiency measurement techniques, better known as data envelopment analysis (DEA). The basic question we intend to answer is whether cars providing a higher quality-price ratio for consumers tend to increase their market share compared to variants with lower quality-price ratio for consumers. The relationship between a car models’ fitness and its market performance is empirically tested in a regression framework. The results show that the principle of ‘growth of the fitter’ is working as suggested by evolutionary theory. In particular, we find that car models with considerably lower fitness than the market average lose whereas models with above-average fitness gain additional market shares.