Market structure of USA Automobile Industry

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The USA automobile industry is dominated by four main large firms. These are the General Motors, Ford, Chrysler, and Toyota. These four firms form an oligopoly market structure. This essay will discuss the market structure of the USA automobile industry in terms of its defining characteristic and ways firms in the industry maximize profits. The automobile industry is an example of oligopoly market structure. An oligopoly is an imperfect competition market in which the industry is dominated by a few large firms (Tucker, 2009). An oligopoly is characterized by a few large firms, homogeneous or differentiated products, and difficult market entry. Currently, the automobile industry in the US is dominated by the General Motors, Ford, Chrysler, and Toyota.  These four main firms rely heavily on the decisions of made by each other. When for example the General Motors considers a price or style change, it must predict how Ford, Chrysler, and Toyota will respond to these prices and style. Thus, there is a mutual interdependence of firms in this industry. In an oligopoly firms produce standardized or differentiated products (Tucker, 2009). This is the case in the automobile industry. The motor vehicles produced by these four firms are almost similar but they are differentiated in terms of engine power, shape, and other factors. Finally, there are stringent measures that prevent other firms from entering into this market. Barriers to entry into this market include economies of scale, financial requirements, patent rights and other legal issues. In addition, these firms have put up measures that prevent new firms from entering the industry. These firms apply predatory pricing and excess capacity to lock out new firms. The three characteristics of an oligopoly influence how the firms in this industry maximize profits. The mutual interdependence of firms in an oligopoly affects how they maximize profit. If one firm, for example, increases prices other firms will not follow suit, however, if it lowers it prices other firms in the industry will lower their prices to counter the prices. This results in an emergence of a kinked demand curve. Graph showing how the demand and marginal revenue curves become kinked when an oligopolistic firm raises its price but the others do not follow, but if it lowers its price, then the other firms match the price decreases.”A firm in this industry will maximize profit at quantity Q1 and price P1 where MC=MR. Therefore, a change in MC will not affect the market. In conclusion, the USA automobile industry is an example of oligopoly market structure. It is characterised by a few large firms, differentiated products and barriers of entry to the industry.

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