R&D Rivalry in the U.S. Automobile Industry: A Simultaneous Equation Model Approach to Bain's Hypothesis

Abstract

This paper investigates rivalry in R&D expenditures for firms within the U. S. Automobile industry. It attempts to falsify Bain's paradigm that firms in that industry collude in price, and compete primarily in advertising and secondarily in R&D expenditures. We start with a single equation model of an earlier specification that falsified R&D rivalry for the auto industry, using a smaller sample size. The result also was insignificant, lending credence to Bain's idea that a more concerted effort is needed to ascertain R&D rivalry. To accommodate Bain's hypothesis, we embedded the R&D equation within a system of equations framework, where interactions between advertising, dividend, investment, and finance are co-determined. The system model gained efficiency through explicit specifications for technological and marketing constraints. The results corroborate Bain's hypotheses that R&D rivalry is present only when R&D expenditure is foiled with advertising and other financial ratios.

Dealership Competition in the U. S. Automobile Industry

“…The advertising results are fairly stable-only the con stant term did not hold up. The financial model has the same amount of significant influence as in the earlier study (Ramrattan [1998] …”

“…We found that the best method and the one adopted in this paper was obtained from embedding the single equation model into the Dhrymes and Kurtz system of equation model for the firm. (Ramrattan [1998])…”

“…3, 4, and 5 were specified by Dhrymes and Kurtz [1974], [1967], and the R&D equation 6 by Grabowski and Baxter [1973]. Advertising equation 2 is a specification for Bain's hypothesis that was corroborated in two studies (Ramrattan [1986], [1994] (Ramrattan [1998]). …”

“…This paper is a sequel to several articles in this journal (Ramrattan [1991]; Ramrattan [1994]; Ramrattan [1998]) that apply Joe Bain's hypothesis to the U.S. auto industry. According to Bain, auto firms engage in dealership rivalry partly to maintain the product preferences of buyers, partly to sell a substantial part of their products through retail deal erships, and partly to promote sales, specialized maintenance, repair service, and easy access to replacement parts (Bain [1956], p. 300).…”

“…THE AMERICAN ECONOMIST rattan [1998] (Ramrattan [1998]). The investment equation shows five significant coefficients vs. only three previously and the dividend equation holds its ground.…”