Pricing automobiles to reflect their perceived quality differential in the U.S. automobile market: An empirical study

At the beginning of the 1980’s, there was a gap in quality between cars from the Big Three and those made by the Japanese. Since then, the Big Three had adopted the Japanese production techniques, parts procurement practices, and labor relations to improve quality of their automobiles dramatically. During the period, the Japanese manufacturers kept their automobiles more expensive than the comparable models made by the Big Three to slow their sales, to blunt trade frictions, and to prevent possible dumping complaints by the Big Three. Yet the Big Three lost the overall U.S. market share to 68.3% in 1999 from 73.7% in 1985, while that of the Japanese automobiles increased to 24.0% from 19.8%. We know that reliable automobiles are less expensive to maintain and repair. They may even be able to command higher resale prices. Nichols and Fournier (1999), after having examined how reputation for quality affect pricing in the U.S. used–car markets, concluded that “adverse reputation has reduced the prices of U.S. automobiles through 1990.” The question is then: did the long–term savings from reliable automobiles warrant U.S. consumers’ opting for them even with their higher initial prices, or were U.S. consumers’ automobile purchase decisions influenced not by the initial price, but by the total cost of ownership (TCO)—the initial price, the fuel cost, the maintenance and repair expenditure minus the resale price? We wrote this paper to investigate the validity of the hypothesis. To answer the question concretely, we estimated the vehicle specific TCOs in U.S. dollar for twenty–six popular 1996–model–year vehicles in their first eight years of ownership. They were selected from the thirty bestselling passenger cars and the twenty bestselling minivans, SUVs, and pickup trucks in the United States during 1992–1999 and consistently on the bestselling list throughout the period. We then discussed the relationship between the estimated TCO and the market