The Price Evolution in China's Automobile Market

Abstract

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 multi product 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 percent 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.

Keywords: China automobile industry, differentiated products, random coefficient discrete choice model

JEL Classification: L11, L62