Our family has reached a crossroads, and it's finally time to upgrade the old family wagon to accommodate our growing family. It has been several years since our last car purchase, and I've had no reason to pay any attention to car prices during that time. So I was shocked as we began our search only to find that our budget, being based on an average median household income, wouldn't go very far. I couldn't avoid the big question, what could possibly make a depreciating asset that serves no greater purpose than getting from point A to point B worth so much money? Granted there are many costs that go into manufacturing a vehicle that aren't directly associated with the cost of parts and labor, but that can be the topic for another blog post at a later time. So what is driving the cost of producing a vehicle on the parts side? In such a competitive market as vehicles, there must be a reason for such inflated auto prices. After doing a little research, I discovered an ongoing issue that our government is combating on a global scale. I was surprised to find articles addressing the issues we face relating to auto parts cartels, or in other words, organized crime in the auto parts industry. This is a crime where like manufacturers are colluding and price-fixing auto parts supplied to auto manufacturers. When I think of a cartel, my mind goes straight to imagining a criminal organization running the drug trade. But in addition to chasing drugs across the border, there is an ongoing investigation into colluding auto parts manufacturers underway by the U.S. Antitrust Commission. They are actively seeking and prosecuting those individuals or companies violating the Sherman Antitrust Act of 1890, where auto parts manufacturers are price-fixing and colluding. These criminals are running the risk of being subject to penalties such as hefty fines and imprisonment if their criminal activity is discovered.
So as my search continues for the new family vehicle, and I continue to be baffled by the extremely high cost of a new car, I must now ask myself if I'm being directly impacted by the organized crime ring of auto parts cartels. I guess the high pensions being paid in the auto industry is only one of the contributing factors of inflated car prices.
Car parts price-fixing fines for Hitachi and Mitsubishi Electric
More auto parts cartels uncovered – do sanctions not deter competition law contraventions?
8 comments:
Chris: 100/100.
I'm sympathetic to your quandary. I'm at the point in my life where I'm hoping that all my cars make it until my youngest is done with college (in 8 years) because I won't be able to afford one before then.
This is an interesting point, and I'll admit I had not heard of it.
I'm dubious for a couple of reasons. First off, neither linked article details how much the price fixing did to increase the retail price of cars. I'm not excusing it, but how much can they actually jack up the price of "... seat belts, radiators, windshield wipers, air-conditioning systems, power window motors and power steering components"? Secondly, most of the detail in the links relates to European regulators. This is purely anecdotal, but my sense is that the European Union is going through a phase of heavy regulatory action, and those things happen, but they don't tend to last. So I think it's probably all true, but in the end probably a minor contributor to your Chris' car purchase anxiety.
FWIW: cars are also a bundled good. Cars are not alone in this trend: a shift towards a more expensive final product that requires fewer repairs down the road. Basically, we all fix things, tinker, and putter, a lot less than we used to.† So, consumers have shifted towards bundles that require fewer repairs, pushing their prices up.
† Want to learn a really useless piece of trivia I came across a few months back? If we "putter" around the house, what did a putter do back when the word was invented? You know ... coopers used to make barrels ... fletchers used to make arrows ... and putters used to make scissors. Who knew?
I had never had to think about the price of a car because I don't own one. My whole college career I have used my scooter or a bike to get to and from school. Now that I am graduating and moving on from Cedar City I have come to terms that I need a car. I, like you, was shocked to find out the price of a new car. It looks like I might have to hang on to my scooter a little longer.
If all of these auto parts dealers are working together it may be difficult for the government to prove they are all colluding. They must have known that government prosecution would eventually happen but if they won't admit to anything I find it doubtful that any legal action will be taken. This reminds me of the great housing market crash. Banks, loan officers and many others were taking part in shady practices that eventually caused the recession but hardly any people, if any, were sent to jail.
Dr. Tufte made a good point that this colluding may be only responsible for a little part of the higher price. I wonder how long this possible price fixing strategy has been going on. It may be the case that it took many years of slowly raising prices that their strategy went unnoticed. Now that the price of a car is ridiculously expensive these companies may have a general excuse that inflation caused the price of the car to go up or any other number of lies to get out of their situation.
Your post, Chris is really interesting and I’ve never delved into auto prices that deeply. However it does make sense with globalization that could be a strong factor into prices. I purchased my current car almost 8 years ago new and the price I felt was reasonable. My mechanic told me, that car was essentially a disposable and now I have ninety-two thousand miles, which is honestly average for the age of the vehicle, but the low level of maintenance required is what impresses me.
I’d like to take your concept and Dr. Tufte’s further; I believe there is also an aspect of quality onto these parts and transferred to the vehicle. Even what is considered to be the cheaper model of vehicle has increased quality. I am reminded of when I was a kid, the general consensus was pay more, buy Japanese it lasts longer. That trend has narrowed over the last 20-25 years maybe because we are in a global economy and also quality of vehicles global has increased. That also could be a factor into the higher prices you’re seeing. As the quality has gotten better, it has forced prices to shift higher also.
I am getting increasingly dubious about this as a major news story (you all can still comment on it all you want though).
I've been poking around a bit on the internet, and I am not impressed with what I've found. First off, many of the top links are actually press releases from government agencies — often the exact same press releases. There's also a lot of links to Law360.com, which is a fine site, but it doesn't create content it just aggregates (and trumpets) the content of others — including press releases. There's also quite a bit in "trade publications" — outlets like Motoring, Automotive News, and Collision Week. There are some items from wire services like Reuters and the Associated Press that sell generic content. But I found zero mentions (I repeat, zero) in The New York Times, The Wall Street Journal, the Washington Post, and major magazines besides Fortune, or TV networks other than ABC ... you know, the sort of places that employ investigative reporters who do in depth coverage. After some digging, I was able to find an in depth piece in ... wait for it ... The Columbus Dispatch. They dug to what passes for a bottom to this story, and reported this:
“'The bottom line is that Americans paid more for their cars as a result of this collusion,' said Marvin Price, criminal director of the Department of Justice’s antitrust division.
How much more did consumers pay? We don’t know."
So, the only in depth piece I could find uses as its best evidence that there's a problem, a quote from a government official saying there's a problem.
On top of this, what I did get out of all this was two more pieces of information that make me suspicious of the whole thing. First off, the prosecutors developed evidence by offering immunity to firms involved that were willing to offer evidence against their competitors. You've all watched enough courtroom dramas to know that a lot of evidence is developed that way, but it's often discounted by juries as tainted. Even worse, the first evidence from any country came up in the U.S. where a firm volunteered evidence under a reward program. Secondly, everyone who's pled guilty is a Japanese citizen being tried in the U.S. My experience is that foreign nationals are often guilty of crimes, but that they also have very reasonable reasons for avoiding prosecution in foreign countries.
Lastly, these cases also demonstrate a common feature of government prosecution of firms. Namely the firm is the target, the firm cuts loose some employee, the prosecutors extract a guilty plea from the individual without a trial, and that plea is used to extract a fine from the firm (which doesn't admit guilt).
mholley: 44/50, "I wonder how long this possible price fixing strategy has been going on." is a question, and should have a question mark. (-3) In "It may be the case that it took many years of slowly raising prices that their strategy went unnoticed." the last 5 words don't agree with the earlier part of the sentence. (-3)
CJ: 41/50, In "However it does make sense with globalization that could be a strong factor into prices." what does "that" refer to? Also, "into" is not the right word here. (-3) In "I believe there is also an aspect of quality onto these parts and transferred to the vehicle ..." the word "onto" is inappropriate. (-3) In "My mechanic told me, that car was essentially a disposable ..." you do not need a comma before that. (no points taken off) What is meant by "... quality of vehicles global ...". (-3) You also used "into" inappropriately a second time in "... a factor into higher prices ...". (no penalty).
I'm a father of teenagers. Does it make me a bad guy if I'm secretly pleased when I read college students admit to being surprised at the cost of stuff adults buy? ;-)
mholley: it's off subject, but it's mostly politicians and the media who blame "Banks, loan officers and many others were taking part in shady practices that eventually caused the recession". Economists have been looking at that for years, and we're not finding much evidence. There have been some guilty pleas, but we always wonder if that's just cheaper than litigation.
I also tend to doubt that inflation had much to do with it. This has been running at a fairly low rate for over 30 years. CJ is right: most of the increases in prices of cars are because the ones they're selling really are higher quality.
In general, both mholley and CJ (and Chris too) are too willing to attribute prices to nebulous forces like collusion (not much evidence in this thread), inflation (not that high), and globalization (difficult to quantify). A point of getting a more advanced degree in business is to get used to not using this sort of weak evidence, and instead focus on the more mundane stuff like marginal cost.
Sir, I have a question concerning your final comment on the "mundane stuff". Isn't using marginal concepts for a post like this mostly speculation? Or is it as simple as telling us to realize that part cost plus markup is passed on to the distributor and then to vehicle manufacturer and then finally transferred to the customer? That's even without the foundation of structuring the price of the part from material costs and manufacturing expenses. I have to apologize, I work for the probably the second largest food distributor in the nation and deal with margins daily and it didn't cross my mind to suggest that costs are transferred across the supply chain, especially in vehicles. The reason I asked about speculation, while the principle of cost transference exists but we don't know actual prices or costs to show marginal cost or benefit. Or perhaps I'm misunderstanding what you've wrote.
CJ: 44/50 In "Or is it as simple as telling us to realize that part cost plus markup is passed on to the distributor and then to vehicle manufacturer and then finally transferred to the customer?", I'm not sure exactly how you wanted this to sound, but I'd say you're missing a definite article and a preposition. (-3) Then you wrote "The reason I asked about speculation, while the principle of cost transference exists but we don't know actual prices or costs to show marginal cost or benefit." which really isn't a sentence because the objects don't agree with the subject. (-3)
I see your point CJ. I don't think you misunderstood at all, although perhaps you think I'm being more adversarial than I really am.
What I'm trying to do is steer (all current and future) students (who end up reading this thread) towards using the methods and terminology outlined in the text instead of the platitudes fed to us by the legacy media, politicians, and bureaucrats.
I emphasize a lot in my principles of macroeconomics class that by the time they finish the class, most of those students know more macroeconomics than the people they hear discussing issues on TV. The same thing goes for this class. In writing on this blog you're going out and finding stuff that is often written by people who know less economics than you do, and who are writing for an audience that may know less too. I want you folks to be able to parse through that stuff.
So, no, marginal costs aren't speculative. We can say a lot about marginal costs without knowing anything about the numbers: they have to be U-shaped, firms are always operating on the right hand side of the minimum, free entry and exit pushes price to marginal cost, and any price above marginal cost is indicative of some market power to keep prices up. In this case, the point of collusion is to push prices above (or further above) marginal cost. Prices are always above average variable cost, so proving collusion would be a subjective matter of whether the degree of excess is large enough (and proving innocence would be subjective too). But if price equals marginal cost, the firm has proved its innocence in a far more objective way. And in the case where price exceeds marginal cost we're just no worse off than making a subjective case that the degree is too high.
Further, in antitrust cases they do discuss these issues precisely. So referencing my grousing comment about the feel I am getting for these auto parts cases ... the fact that they aren't talking publicly about mark-ups over marginal costs makes me think the prosecutors are just bullying because the facts aren't on their side.
Now I do recognize that this is a bit much to coax out of a student at the MBA level. This is why I want you to "play" with the ideas because that's how you figure out how deep they go.
So getting back to my dissing of collusion, inflation, and globalization as explanations, I think that journalists throw these ideas around too casually. And I don't want students to do the same. There's a reason that economics books spend so much time talking about marginal cost (and other ideas), and so little about stuff like globalization: it's because those others are throw-away arguments.
Let me run with the globalization argument a little. You asserted that globalization could factor into prices. I didn't take off points for that, because I want you to "play" with some ideas. But I think it's pretty much throwing out a buzzword. Globalization has little to do with the cases Chris initially brought up: the companies seem to be mostly Japanese, operating in America, with English speaking prosecutors going after natives of another country. The subjectiveness of all that pales in comparison to the issues at hand with collusion: objective prices, reasonably objective estimates of marginal cost and incremental mark-ups, and competitors who are playing by the rules and getting their profits driven to zero. I want to see more focus on the objective stuff.
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