An analysis in to the structure of the automotive industry
Introduction
This analysis and explanation of the structure of the automotive industry shall be limited to the boundaries of the UK. The automotive industry has a few larger businesses that have a larger market share and then some slightly smaller businesses competing with each other. Due to these facts the industry has been described as an oligopoly. This is because within an oligopoly there is a large number of product differentiations, which mirrors the automotive industry as the same company usually produces a wide variety of different models, shapes & engine sizes. Another feature is that the barriers entry are generally high as the few firms with a larger market share have already established themselves within the market and the firms with a reasonable market share are also fairly established and have a lot of capital. This makes it difficult for small & upcoming businesses to enter the market.
The overall global automotive market is in a period of strong growth and profitability, and sales have reached prerecession levels in some areas. However the European and UK market is recovering the slowest due to the scale of the recession (Hirsh et al, 2014). This may have altered the structure of the industry as a whole.
Industry Structure
This chart is a representation of how the market share of each company is divided up in UK market in 2014. This evidence helps to further back up the point that the automotive industry is an oligopoly (imperfect) as few firms are the market leaders with a higher percentage e.g. Volkswagen, Vauxhall and Ford. Whereas many other firms are operating around the same market share.
Source - Mintel
Source - Mintel
Supply may be set to fall as the price of raw materials is predicted to increase further. This is due to a general shift in the materials used; aluminium instead of steel. Businesses such as Ford are making the switch towards aluminium in some cases as it is a lighter alternative, as every 10% reduction in weight reduces fuel economy by 5%-7% (Kallstrom, 2015). This is important as I will help to comply with EU emission laws giving them an advantage on their competitors. However Volkswagen did not and is having to recall millions of cars back, costing billions. The emissions scandal has left Volkswagen having to lend £14 billion (Davies, 2015) and seeing their share prices drop.
Key Factors Affecting the Industry
Consumer demand is also changing as there is a shift towards the willingness to spend on a car due several factors. The automotive industry tends to use physical product differentiation which involves altering their products in shape, size, and performance. This makes each product distinctive so consumers have options of which brand and model. In order to achieve a foothold in the market, many firms with a smaller market share place high importance on their advertising campaigns as it is an opportunity to distinguish themselves from their competitors offering similar products within the same time period. One of these factors is due to the amount of product differentiation which has been further developed by the overall rise of the vehicle quality in the industry. Consumer expectations are changing as quality improves, meaning the special features of cars in the past are thought of as standard in today's market. Consumers can pick and choose which features they want in their cars, giving them their ideal cars. This means each firm will compete against each other to better themselves, giving the consumer a wider choice of products. Due to this competition, price may be lowered in the attempt to win customers, increasing consumer demand.
Entry barriers are high in oligopolistic structures as it is difficult for a new company to establish themselves among the already competing ones. Recent government intervention has made barriers for entry even more difficult as each firm will now have to comply with emission regulations which increase costs. This would incur large costs on a business just starting up as they already have high fixed costs, possibly leading to them failing. Another factor is brand loyalty and reputation. If a certain brand or model of cars as been reliable and impressive for a consumer in the past, it may influence their decision on which car to purchase next, which disadvantages any new companies hoping to enter the market immediately as consumers are less likely to drift from their usual preferences. If a business has been in the market for a long amount of time, they would have well established distribution channels worldwide and good supplier relations. This is important as good relationships can help the business benefit from quick, efficient service and discounted prices via economies of scale. A large company can use economies of scale to exploit their smaller counterparts. Economies of scale refer to the declines in unit costs of a product as the absolute volume per period increases (Porter, 1980). This can deter entrance to the market by forcing them to enter the industry producing high volumes, which they are unlikely to be able to deal with. The distribution and supplier channels can allow firms to react to trends and changes quickly in market and prevent them from being disadvantaged. In contrast to this, smaller firms will not have stronger international relationships with suppliers or may struggle to establish them quickly enough so will find it difficult compete on this scale.
Non-price competition is heavily used in the automotive industry as firms place high importance on marketing campaigns and other techniques in an attempt to increase brand loyalty. This can be difficult in the automotive industry as consumers do not always tend to be loyal to one brand, but move between brands depending on price and taste. However, this can be done by improving service quality for consumers which gives the company a good reputation therefore encouraging repeat business. Another strategy could be to offer discounts on the car or upgrades to the car to ensure the consumer remains a customer.
How Industry Characteristics Affect Performance

Source - tutor2u
Source - tutor2u

In an oligopoly, when a business changes their price the other businesses within the market can act in one of 2 ways, as demonstrated in the graph (kinked demand curve model). If a company increases their prices, the other competitors will most likely not increase their prices as they see this as an opportunity to gain a higher market share. This is because consumers will tend to buy the product which is lower priced therefore leaving the higher priced company with a reduced market share. For example if Vauxhall increased the price of their Zafira, Ford will not increase the price of their C-MAX as it will make them a cheaper alternative for consumers looking for a similar type of car. On the other hand if a company decides to lower their prices, there is a high chance that other companies will follow them. If these other companies also lower their prices, they can remain competitive in the market as they can match their counterparts' actions which limits the fluctuation between market shares. This is a prime example of interdependence and happens quite regularly but usually due to seasonal demand or in certain periods e.g. Christmas as all companies know consumers may be looking for deals. This further demonstrates the strategic interdependence involved in oligopolistic markets as companies must Source - http://economicsconcepts.com/three_imprtant_models_of_oligopoly.htm
Source - http://economicsconcepts.com/three_imprtant_models_of_oligopoly.htm assess what their competitors are doing or planning in order to decide what they should do themselves.
Another theory is when collusive oligopoly occurs and the firms that dominate the market join together and agree on certain terms such as not changing their prices or limiting the output they each produce. This can be done to retain their high market share and fend off any other firms from challenging. It can also aid each firm in maximising their profits as they can concentrate on their own actions instead of having to constantly monitor their competitors' every move. This can be referred to as the 'cartel' theory.
Within the UK automotive industry, 3 companies mainly dominate the market which are Ford, Vauxhall and Volkswagen. In this industry there are a lot of others companies which have a reasonable market share but less than the top 3. The market concentration ratio is 32.8% (Mintel, 2015) for the 3 market leaders. This accounts for just under a third of the entire UK market.Source - figures from Mintel
Source - figures from Mintel The structure of this industry is not as highly concentrated as some other industries because there are a large number of companies operating around the 3% market share area; accounting for the rest of the market. On the other hand the supermarket industry has a larger firm concentration ratio as only 4 firms dominate the market. The graph shows how the market share of each industry leader has generally declined over the past 3 years. This may be due to the characteristics of the structure of the automotive industry. Some of the firms with a lower market share can launch, for example, a large advertising campaign or a new car which could gain them a very small increase in market share thus bringing the leaders' down. An example of this would be Skoda who managed to increase their market share by 0.5% (Mintel, 2015) in just 3 years as they moved from 2.6% to 3.1%. This drop in market share for the industry leaders could be due to a change in technology as some smaller companies are focusing on developing eco-friendly cars and hybrids. As government policy on emissions is a very current issue, these firms have spotted an opportunity to ensure they are one step ahead. For example, Nissan have placed significant importance on this and have created a hybrid car called the 'Leaf' and a range of other vehicles and it seems have paid off as they have increased their market share over the last 5 years from 4.4% to 5.6%.
Conclusion
This analysis has discovered how each factor within the structure of an industry can have huge implications on the performance of the businesses operating in it. Due to the automotive industry being an oligopoly, only a few firms dominate the market as there is a high firm concentration ratio. They also have high product differentiation and barriers to entry are high due to the many factors that have been explained, such as smaller firms having to enter the market producing on a large scale due to the already established firms using economies of scale.
Also provided was a number of graphs which helped to show how the characteristics of an oligopolistic industry can directly affect the performance of the companies competing in it. For example, the kinked demand curve graph clearly explained how businesses are interdependent as they will change their prices based on what their competitors are doing; if one firm increases prices, the others may not react or lower theirs and if one firm lowers theirs, the others will most likely lower theirs too to remain competitive. Another theory that was included was the 'cartel' theory which further explained the previous graph as it showed how many firms will group together and agree price terms to prevent regular price fluctuations and prevent any new firms from entering the market. The various theories and explanations provided throughout this essay have been to analyse the structure of the automotive industry.

Bibliography
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Non-price competition in imperfect markets | economics (2015) Available at: http://www.tutor2u.net/economics/reference/non-price-competition-in-imperfect-markets
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