The Price Evolution in China's Automobile Market

• DOI: http://doi.org/10.1111/jems.12116
• Date: 01 October 2015
• Published date: 01 October 2015

The Price Evolution in China’s Automobile Market

SHANJUN LI

Dyson School of Applied Economics and Management

Cornell University

Ithaca, NY 14853

SL2448@cornell.edu

JUNJI XIAO

Department of Decision Sciences and Managerial Economics

Chinese University of Hong Kong

Shatin, N.T., Hong Kong

junjixiao@baf.cuhk.edu.hk

YIMIN LIU

Ford Motor

yliu59@ford.com

The automobile market in China has seen unprecedented expansion during the past decade with

rapid model turnover and dramatic price decline. This paper aims to document the evolution of

price and investigate the sources of price decline, paying attention to both market structure and

cost factors. We estimate a market equilibrium model with differentiated multiproduct oligopoly

using market-level sales data in China together with information from household surveys. Our

counterfactual simulations show that (quality-adjusted) vehicle prices have dropped by 33% from

2004 to 2009. The decrease in markup from intensified competition accounts for about one third

of this change and the rest comes from cost reductions through learning by doing and other

channels. In addition, our simulations show that the price decline would have been larger had it

not been for the growth of household income during this period.

1. Introduction

The persistent and significant price decline is one of the most salient features of China’s

automobile industry in recent years. The average vehicle price in real terms has been

dropping about 8% each year during the last decade accompanied by arguably improved

product quality from year to year.Our paper aims to document this trend and investigate

the underlying drivers of the price evolution within the framework of a differentiated

multiproduct oligopoly.

Over the past 30 years, China has embarked on an extraordinary journey of eco-

nomic development with its rate of GDP growth averaging about 10% a year: per capita

GDP increased from less than $200 in 1980 to almost $5,500 in 2011 in nominal terms

according to the World Bank. The automobile industry, considered as a pillar indus-

try in the national economy, offers a unique window through which one can learn

how this remarkable process has unfolded. Like so many other industries in China, the

automobile industry grew from virtually nothing (e.g., a total output of 200,000 units

We thank Benjamin Leard, Xiaolan Zhou, Jin Li, two anonymous referees, our coeditor, and participants at

the 8th Workshop on Industrial Organization and Management Strategy for their suggestions and helpful

comments and Pei Zhu for excellent research assistance. All remaining errors are ours.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume24, Number 4, Winter 2015, 786–810

China’s Automobile Market 787

05000 10000 15000 20000

1995 2000 2005 2010

year

Total SUV/MPV

Sedan

FIGURE 1. HISTORICAL AUTOMOBILE SALES 1993–2010

Note: Data come from various issues of China Automotive Industry Yearbook. The total sales

include passenger cars (Sedans, SUV/MPV, pickup trucks and vans) and heavy-duty trucks.

in 1980 with less than 5,000 passenger vehicles) to the largest in the world with a total

output of over 18.5 million units including 14.5 million passenger vehicles in 2011, with

the rapid growth starting from the turn of the century (Figure 1).

As a result, this industry stands to offer a fertile ground for understanding many

interesting questions such as pricing decisions, product choices, industry dynamics in

an emerging market. Research on this industry has started to emerge only recently. Deng

and Ma (2010) investigate the market power of manufacturers in the industry from 1995

to 2001 during a period of rapid entry of new firms. Their empirical results suggest that

the market power of major automakers in China is declining. The intensified competition

in this industry is further confirmed by Hu et al. (2014): even joint ventures within a

corporation group (i.e., different joint ventures with common stakeholders) compete

rather than collude with each other in setting prices. Studying consumer boycotts of

French brands in China in 2008, Hong et al. (2011) find that political events could have

a large impact on automakers’ market shares in this market dominated by first-time

vehicle buyers.

Our paper adds to this growing literature in two ways. First, we describe the per-

sistent and dramatic price reduction in China’s automobile market. Although the price

evolution is an important facet of this complex and evolving industry, no empirical

study has systematically documented it. The significant price decline has important im-

plications beyond the industry: although it has benefited consumers in that more and

more families are able to afford their first vehicle, the dramatic and rapid increase in

vehicle ownership, especially in urban areas, has outpaced the growth in road infras-

tructure, environmental regulations, and domestic oil supply. Second, the continued and

significant decline in vehicle prices is likely to be driven by a host of factors. The ob-