Bertrand and Luxury cars

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.

5 thoughts on “Bertrand and Luxury cars

  1. There seems to be a bigger price war brewing. An article from the Los Angeles Times reports that Audi announced Thursday that its 2015 A3 sedan to start at $30,795. The article also reported that Mercedes CLA sedan’s real base price is $30,825 (perhaps the base price of a CLA has climbed since the Super Bowl ad last February). It will be interesting to see if the market will follow the Bertrand story with the release of the A3. The CLA seems to be dominating the luxury sedan market in the U.S. for the time being, but A3’s slightly lower price change everything — in the Bertrand story. Audi would take the entire market and leave Mercedes and BMW without any buyers.

  2. This would suggest that the market for cheap luxury cars is highly elastic. A price difference of less than a few thousand dollars (around 1/15 to 1/30th of the car’s price) causes a significant change in demand. Perhaps this is due to the nature of the buyers, who are trying to get as much as they can for as little as possible. Could the nature of the market contribute to whether Bertrand or Cournot applies to the situation?

  3. Marketing surely comes into play when dealing with cars which are basically substitutes (Drive from Point A-B). Marketing as we saw with beer did not change the demand curve but took market share away from competitors. How Mercedes markets its new car may impact how well it does in America.

  4. I agree that this does really indicate either a very elastic market in luxury cars, or that advertising is particularly effective when dealing with luxury cars. It would be interesting to see other historical examples of advertising in the luxury car market, to see whether huge swings like the one witnessed here are the result of advertising, or just a particularly elastic market.

  5. While Mercedes is selling far more cars than BMW, are there other explanations? Are consumers actually buying cars at the base price (with Mercedes at a slightly lower price) or are consumers getting luxury items added that raise the price? Would this affect what kind of quality/price consumers are paying for?

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