Monday, July 21, 2014

Tesla and Car Dealerships

The Wall Street Journal reports that Tesla wants to sell cars directly to car buyers, but car dealers are opposed as it violates state franchise laws.  The automobile production market is very similar to a market structure in economics that is called an oligopoly.  Likewise car dealership is also less than perfectly competitive.  So, if we have some oligopoly manufacturers selling to some oligopoly retailers that behave as Cournot firms (and the automobile industry seems to be a good candidate), the economic incentive is that the manufacturer and retailer will combine forces (either merge or form a legal relationship) as it is their dominant strategy.  Problem is that if the retailer does not have some type of relationship with the manufacturer, the retailers profits will fall, which is the conclusion from the Cournot oligopoly vertical relations model presented in class.

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