Game theory and auto subsidies

by on December 9, 2008 at 1:34 pm in Economics | Permalink

One thing here is that as best I can tell none of the five countries – US, Japan, Germany, France, Korea – with substantial auto industries are willing to let their national favorites fail. And yet there seems to be substantial global overcapacity in car manufacturing. If a few of the existing firms are allowed to fail, then the survivors will be in good shape. But if nobody fails, then all the firms worldwide will be left suffering because of overcapacity problems, all potentially drawing bailouts and subsidies indefinitely.

Here is more.

1 darin london December 9, 2008 at 1:38 pm

This is something I cant fathom? Why does Ford only feel like it will need to draw on the lifeline if one of the big 3 FAILS!? I would think that any company would be in a better position within the market if their major competitor went bankrupt, unless, of course, it gives GM a competitive advantage by, say, allowing them to screw their labor unions easier than Ford can outside of the provisions of a restructuring

2 Sam December 9, 2008 at 1:45 pm

That’s a classic Nash equilibrium. I think we all know what’s coming.

3 Ghoghogol December 9, 2008 at 1:56 pm

Both China and India have substantial national auto industries that are viable (so far) without subsidies. You seem to have left them out.

4 jason voorhees December 9, 2008 at 2:28 pm

In this model, aren’t there two Nash equilibria? One in which company A enters and B doesn’t, and one in which Company B enters, and A doesn’t. (And then probably a third in mixed strategy in which each is entering some portion of the time). You can eliminate, technically, one of these Nash equilibrium by subsidizing a firm to enter the market such that it’s their dominant strategy, and as a result, the other firm doesn’t enter. Could you justify a bailout on those grounds, then? It’s a direct subsidy to the firm, but it creates a dominant strategy for the firm, and in turn forms a credible threat that keeps other firms out.

5 garp December 9, 2008 at 3:06 pm

Perhaps there is a bigger issue.Because US government gave this bailout to Big Three, why would France or Germany do the opposite.If Germany let Wolksvagen and rest to fail,it would lead more US cars to be sold in German market.That is probably main reaon.

P.S. Sorry because my broken english

6 Roland Stephen December 9, 2008 at 3:13 pm

The Europeans have wrestled with this for many years, trying to govern it through “competition policy” If it is truly a PD, then little can be done, but it it is a coordination problem, bedeviled by bad information, than an international regime that fosters transparency will allow each player (govt.) to limit offer to their own domestic clients.

7 LSK December 9, 2008 at 3:53 pm

I think one of the advantages Europe enjoys over the U.S. is their expansive system of public transportation – I don’t think it’s irrational to argue that the dependence Americans have on their auto industry is due to the individualism (and perhaps slight selfishness?) that is idiosyncratic to people in our country. I, for one, loooooove my Jeep. But do I love paying for its continuous maintenance, feeding it gas – which, coincidentally, I have as of recently been considering consuming myself due to how cheap it’s become, if only temporarily, oil changes, insurance, etc? No.

If American auto industries are allowed to fail, millions of jobs (I think I read 3?) would be lost, including ones directly and indirectly related to manufacturing and sales. That’s sad. What’s even sadder is that these same jobs could be re-allocated to projects that would assure that Americans are not as dependent on that same industry for sustenance. If I were a car salesman I wouldn’t be able to build a railroad, but I could sure as hell become a conductor. A train operator, even!

Well, whatever. What’s done is done. I think the bigger picture is that we’re all in this together. I have, however, been considering purchasing a Cadillac because they’re literally dirt-cheap now. Desperate times call for desperate measures.

8 J.B.Se December 9, 2008 at 4:36 pm

Same problem as Vertiginous. Why would any carmaker have to fail? Why not just reduce production (by slashing employment)?

9 babar December 9, 2008 at 6:03 pm

There is overcapacity? Maybe. Numbers please.

10 Bill Stepp December 9, 2008 at 6:10 pm

Came here today looking for the “Markets in Everything- U.S. Senate Seat” post. Where is it?

It got auctioned off already, and an Illinois pol bought it for top dollar, as part of a tit for tax with some other pol.

11 Bernard Yomtov December 9, 2008 at 8:46 pm

Agree with vertiginous. “Overcapacity” describes factories, not companies.

12 David Z December 9, 2008 at 11:13 pm

babar asks for numbers – I don’t have them off-hand, but a year or so ago I spoke to a former Chrysler exec (with whom I now work) who intimated that at the time (June, 2007) global capacity was something like 50% greater than global vehicle sales. The world is on pace to produce something like 40 million vehicles this year. To put it in perspective, in 2006, total vehicle sales per was only about 17 million.

13 babar December 10, 2008 at 6:44 am

Came here today looking for the “Markets in Everything- U.S. Senate Seat” post. Where is it?

There is a theory that Obama was short that seat and has made a killing now that its market value has crashed.

14 Sebastian December 10, 2008 at 12:25 pm

Matt’s formulation is a little bit too journalist-even-handed. Some of the countries he names don’t have failing auto industries that require bailouts; it isn’t as if all of them are on the brink of failure, and all of them are being bailed out.

If there is substantial over-capacity it makes sense to let the failing ones fail. The successful ones have proven that they make such a good product as to succeed even in the face of the current global over-capacity.

I also note that typepad seems to have converted you to the awful ‘next’ format in comments, which almost always leaves the last few comments on each page stranded apart from the conversation.

15 LSK December 10, 2008 at 5:50 pm

Grant, I was referring more to the unwillingness to address the auto sector’s problems on a larger scale – if America is as dependent on automobiles for employment, transportation, and export profit (which is arguable, since U.S. cars really only sell very well in Russia), I don’t see why eliminating our reliance on the sector has not been considered as part of the solution.

True, some geographical areas of the U.S. like the Mid West or the deep South do heavily rely on cars for transportation, but the most populated sectors of the country (the West and East coasts) can establish an efficient system of public transportation.

I don’t want to sound all “Who is John Galt” from Atlas Shrugged but the benefits of creating such a system are underestimated, in my opinion.

16 rebuildable salvage May 24, 2010 at 2:11 am

yes these successful countries are now focusing on the new era of modern world and also to make the automobiles technology best for nature and human.

17 Josiah November 25, 2010 at 8:02 pm

None of the mentioned countries would let their own car manufacturers fail. It would be madness, their economy would go down with the speed of light, and for what, for helping other auto manufacturers? I don’t think so, these countries will play the car cover role for these mechanical monsters.

18 HaylieIdida March 10, 2011 at 10:35 am

What’s the point in loosing money endlessly? A friend of mine, who sells discount auto parts used to tell me that if a big multinational auto company would fail, then the others will have a huge advantage. I guess that the governments just want to prevent that from happening.

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