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Game theory and auto subsidies
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.
Posted by Tyler Cowen on December 9, 2008 at 01:34 PM in Economics | Permalink
Comments
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
Posted by: darin london at Dec 9, 2008 1:38:15 PM
huh? At the moment, all manufacturers are cutting production. Why should a reduction in production take the shape of failure of one of the companies, instead of an across the board reduction?
Posted by: Zamfir at Dec 9, 2008 1:42:51 PM
That's a classic Nash equilibrium. I think we all know what's coming.
Posted by: Sam at Dec 9, 2008 1:45:09 PM
Heh, its the ol' "belling the cat" scenario. All countries can agree that there's oversupply in the automobile market as a whole, but none can agree to let their particular favorite automaker fail.
Posted by: quanticle at Dec 9, 2008 1:48:07 PM
Both China and India have substantial national auto industries that are viable (so far) without subsidies. You seem to have left them out.
Posted by: Ghoghogol at Dec 9, 2008 1:56:57 PM
Both China and India have substantial national auto industries that are viable (so far) without subsidies. You seem to have left them out.
Posted by: Ghoghogol at Dec 9, 2008 1:58:38 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.
Posted by: jason voorhees at Dec 9, 2008 2:28:03 PM
Looks like the airline industry...
Posted by: 8 at Dec 9, 2008 2:43:11 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
Posted by: garp at Dec 9, 2008 3:06:34 PM
Indeed, why should the US maintain any manufacturing capability whatsoever? The Chinese power elite are getting fabulously wealthy by manipulating their exchange rate so as to underprice their subjects' labor in international markets to an amazing degree, while at the same time gaining popular favor by putting so many of them to work in export goods manufacturing.
And with the Europeans fixin' to take countermeasures against this, the people running China will need the US even even more as a sink to absorb the exports, and will buy all the debt we can pump out. So why not just import everything?
Of course, there are risks in going down that path. Since paying out yuan at a pegged rate for every dollar the exporters can snag may eventually lead to unmanageable inflation and government overthrow, perhaps with such unrest that source of manufactured imports gets cut off, we might end up in a bit of a bind.
But surely that coudn't happen. I mean, that would be an unprecedented event, like US home prices falling nationwide, or all the big banks in the US failing, and we know unprecedented events like that can never happen, right?
Posted by: jm at Dec 9, 2008 3:11:45 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.
Posted by: Roland Stephen at Dec 9, 2008 3:13:55 PM
Came here today looking for the "Markets in Everything- U.S. Senate Seat" post. Where is it?
Posted by: Tom K at Dec 9, 2008 3:41:44 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.
Posted by: LSK at Dec 9, 2008 3:53:10 PM
Why does any carmaker have to "fail?" How about merely "downsize?" This is a false dilemma. The chief, though not sole force, behind the false "failure or subsidy" model is the political influence of auto-industry unions.
Posted by: Vertiginous at Dec 9, 2008 4:11:17 PM
Same problem as Vertiginous. Why would any carmaker have to fail? Why not just reduce production (by slashing employment)?
Posted by: J.B.Se at Dec 9, 2008 4:36:41 PM
As far as i know, only the Big Three are on the verge of bankruptcy. So that's really not the dilemma we have.
By the way, the Chinese manufacturers are not all really stable either.
Posted by: IWantCookieNow at Dec 9, 2008 5:29:57 PM
There is overcapacity? Maybe. Numbers please.
Posted by: babar at Dec 9, 2008 6:03:56 PM
LSK, the big difference between Europe and the United States is population density. The same sort of coverage of public transport here wouldn't be economical. Australia and Canada have more similar amounts of automotive consumption for this reason.
Roland, isn't a PD "a coordination problem, bedeviled by bad information"? I think it should be noted that an automotive bailout only produces a net benefit to the country's government, and not to its people, as economics clearly shows.
Posted by: Grant at Dec 9, 2008 6:04:36 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.
Posted by: Bill Stepp at Dec 9, 2008 6:10:02 PM
To add to Grant's comment, the US, Canada and Australia live spread out because they could. Some of the rich in France live in urban apartments, but most move out to the country and drive a car to work when they get enough money. It just happened to be cheapest and easiest to do this in America and Canada, for better or worse. There's also the education and crime problems of American major cities which with formerly European inner-cities, but that's another topic for another day.
With peak oil and all that, it will be interesting to see how the trend reverses. I went to Georgia Tech and would love to live in a condo in midtown, but that would just be a reverse commute to my work in the suburbs. Living in the suburbs, for my job, is much lower impact for me. Companies will need to move to mass transit hubs for reasonable space, taxes and parking expenses for anyone venturesome enough to live in higher density to live an urban lifestyle.
Posted by: Mw at Dec 9, 2008 6:21:53 PM
Agree with vertiginous. "Overcapacity" describes factories, not companies.
Posted by: Bernard Yomtov at Dec 9, 2008 8:46:20 PM
Go Jackets.
Posted by: MRD at Dec 9, 2008 11:08:18 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 Edmunds.com was only about 17 million.
Posted by: David Z at Dec 9, 2008 11:13:29 PM
Overcapacity has been designed into the system folks. Do you really think, for example, that CAFE standards that required GM and Ford to overproduce and dump unprofitable cars in order to sell profitable ones was really about the environment? (Yeah, producing 10 cars and 10 SUVs saves way more fuel than simply producing 10 SUVs!!! Sure!!!) Do you really think the auto bailout is about helping the share holders of Ford and GM not lose money?
That "overcapacity" is jobs. It isn't simply a matter of the prisoners dilemma, where the U.S. lowers their overproduction if Germany lowers theirs... Short of some sort of industrial labor shortage or natural resource shortage, why would the political elite in any country want to lower the overcapacity? Every unnecessary worker producing cars no one wants is a happy voter.
Posted by: Rex Rhino at Dec 10, 2008 1:46:07 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.
Posted by: babar at Dec 10, 2008 6:44:59 AM
