10/31/2007

The Best Kind of Sticker Shock

It seems that luxury cars these days no longer have the ability to keep their prices fixed at a high point because of some pretty stiff competition between themselves. This article mentions that Bently, a luxury car manufacturer owned by Volkswagen, can no longer continue to ask the astronomically high prices they used to get before there were other competitors in the arena. It seems that there is quite a list to check up on when looking to buy a luxury car which I believe makes this particular market move from a competitive monopoly to a market that resembles a perfectly competitive market.

This article also mentions that offering a lower priced alternative to their own highest priced luxury car opened up a whole new market of consumers whose reservation price for a luxury car were much lower than the incredible $220,000 version they sold before now...good for their management team on that decision.

As for me, I believe my reservation price for a luxury car will never fit the price tag for one of these cars...and you know what, I quite okay with it.

8 comments:

Wyatt said...

The luxury car manufacturers were smart to produce cheaper cars in the high end market. There seemed to be a large gap in the $90,000 to $180,000 range. Now that market has plenty of supply to fill the demand. That market is definitely growing fast.

Dr. Tufte said...

-1 on Timothy for multiple spelling and grammatical errors.

I think there are two points here.

First, increased competition is making demand for specific makes and models more elastic, thus decreasing markups and prices.

Secondly, I don't think this market has changed from monopolistic competition to perfect competition. Both are characterized by zero economic profits. But it is hard to claim that the products of luxury car makers are undifferentiated, as perfect competition requires. A telling confirmation of that is that firms in monopolistically competitive industries should have excess capacity, and my guess is that this is readily found among luxury car makers.

Sophie said...

The increased competition that is caused by dealers having more lines of luxury cars is resulting in the price of these cars to decrease. This is because the purchaser of one of these cars has more substitutes to choose from. Many dealers are trying to expand into other niche markets because of this competition increase. This increased competition may be hurting many dealers, but the consumers in this industry are ecstatic about it.

Trinity said...

I realize the post was made a few months ago but this author was wrong in his/her assessment of the luxury car market. There has never been a time in the history of automobiles where there are more models of cars available with stickers over 1/4 million dollars. Almost every line of luxury car maker has multiple cars available that cost more than that. The appearance of cheaper luxury cars come because the manufacturers have developed dumbed-down, stripped versions of their cars to sell to anyone stupid enough to pay $100k for a diluted super car.

Dr. Tufte said...

This sort of claim doesn't advance our understanding.

The reason is that there is no adjustment for inflation. Without correcting that $250K point for inflation, this is a straw man.

Gavin said...

Extra Credit - Dr. Tufte
The luxury car market is not perfectly competitive as Dr. Tufte pointed out. Luxury car dealers do have excess inventories of cars that sit in indoor showrooms for extended periods. Luxury cars are highly differentiated in shape and design, despite the use of similiar interior materials and features.

William said...

Dr. Tufte,
I agree with both of your points. I think that competition has definitely increased in the luxury cars area. I believe that over time we will only see more competition until car makers either exit the market, differentiate the product, or their profits are resulted to zero (perfect competition). Of course this will be in the long run, but I think that we will continue to see the trend of cars decreasing in price unless they are able to differentiate the product.

Dr. Tufte said...

Nothing new to add ...