The market for luxury cars in America is dominated by Mercedes-Benz and BMW, according to an article by Bloomberg Businessweek’s Kyle Stock. The article lists Toyota’s Lexus as a distant third place player in the market. To call the market a duopoly might be a stretch, but a recent phenomenon seems to fall in line with Bertrand’s theory on firms choosing prices. Cournot theorized that firms picked output levels and the price would adjust so that consumers would willingly demand the total quantity supplied. Bertrand thought the opposite: firms pick prices and sell the quantities demanded at that price. In Bertrand’s model, the firm with the lower price will attract the entire market and the firm with the higher price will sell nothing.
For the first time in the U.S., Mercedes is offering a luxury car (the CLA) for less than $30,000. The CLA was released in September and in its first week sold 2,300 vehicles. BMW’s comparable model, the 1-series, starts at $31,000 and only sold 468 cars for the entire month of September. The assumptions for Bertrand’s model are idealistic and can only exist in a vacuum, but Mercedes outselling BMW five-fold in one week provides strong support for the theory’s application to the real world.
One factor that might help explain Mercedes tremendous performance could be the market reacting to the new release. Mercedes’s advertising tried to create excitement for the car by emphasizing the low price point. A one-minute Super Bowl advertisement featuring celebrities like Kate Upton and Usher, depicted a shopper choosing to buy a CLA at the base price of $29,900 rather than make a deal with the devil. The excitement surrounding the new release might have swayed the market towards the CLA and away from the 1-series, which was not a new release or as heavily advertised.