Geographical and Multi-product Linkages of Markets: Impact on Firm Equilibrium Interactions (Some Evidence from the European Car Market)

The European car market is characterized by extensive multimarket contact (i.e., the firms are present in many geographic and product markets), a high degree of interfirm linkages, and presence of several global automotive manufacturer groups. The impact of these factors on the firm behaviour has not been considered in the previous studies, which could explain more precisely the firm conduct in the European car market and shed more light on the pricing behaviour differences across markets, thus, possibly contributing to understanding better the price dispersion pattern in the European car market. Multiple market presence is generally argued to foster collusive firm behaviour. The major objective of this paper has therefore been to test the game-theoretic predictions about the impact of multimarket contact on the firm behaviour by Bernheim and Whinston (1990) for the European car market. The results of the study reveal the existence of the effect of multimarket contact on the firm behaviour in the European car market. The impact of multimarket contact on the firm behaviour is economically (quantitatively), however, rather insignificant. The impact of concentration on prices is found to be more considerable. For the mutual forbearance to hold, it may be, however, not just enough to be present in several markets. It could be important for firms to have "spheres of influence" in those markets. The effect of the multimarket on the firm behaviour is stronger in the more concentrated market. Concentration alone also contributes to higher prices. The strategic effects of the multimarket contact could be observed in the European car market, i.e., the redistribution of the market power from the more collusive to the more competitive markets. The result is that multimarket contact may lead to lower prices in the more concentrated markets. To sum up, the results of the study reveal some weak quantitative effect of multimarket contact on pricing/market conduct in the European car market as well as provide some evidence on designing strategic policies by the automotive firms and shifting their market power across the markets, in which they operate.

Leheyda, Nina (2008), Geographical and Multi-product Linkages of Markets: Impact on Firm Equilibrium Interactions (Some Evidence from the European Car Market), ZEW Discussion Paper No. 08-119, Mannheim.