Interdependent Pricing and Markup Behavior: An Empirical Analysis of GM, Ford and Chrysler
Ernst R. Berndt
Ann F. Friedlaender
Judy Shaw-Er Wang Chiang
Our purpose in this paper is to develop and estimate a model of the US
automobile industry that can be used to analyze the secular and cyclical
strategic markup behavior and market structure of its three major domestic
producers - - GM, Ford and Chrysler. The principal novelty in this paper is
not such much in the underlying theory (we build on what Timothy Bresnahan has
called the "new empirical industrial organization" literature), but rather in
the actual empirical implementation of a multi-equation model sufficiently
general to permit the testing of a variety of specific behavioral postulates
associated with the interdependent strategic profit-maximizing behavior of GM,
Ford and Chrysler.
Using firm-specific annual data from 1959-83, we find that at usual
levels of statistical significance, we cannot reject Cournot quantity-setting
behavior, nor can we reject leader/follower quantity-setting behavior with GM
as leader and Ford and Chrysler as followers; the parameter restrictions
associated with leader/follower behavior are slightly more binding than those
with Cournot, although the difference is not decisive. In terms of the
cyclical analysis of market behavior, our most striking result is the great
diversity of behavior we find among GM, Ford and Chrysler. Depending on which
firm is being analyzed, there is support for the pro-cyclical "conventional
wisdom" of markups (GM and Ford), as well as for the counter-cyclical
"revisionist" literature (Chrysler). Diversity, rather than constancy and
homogeneity, best characterizes firms in this industry.
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