Price reactions to new competition: A study of US luxury car market, 1986-1997

This paper examines the questions of whether the incumbent responds to entry and which firms respond to entry in an industry, by using a data sample of the US luxury car market during the period of 1986 and 1997. The statistical analysis finds that the incumbent's response varies across firms, but some group of firms responds to entry similarly. In particular, this paper finds that the German exporters of luxury cars respond significantly to the entry of a Japanese rival in the US market similarly by reducing their prices and mark-ups. The extent to which they respond to entry become greater as the Japanese firm's market share increases. The statistical test accepts the hypothesis of the equality of coefficients among the German firms, but rejects the hypothesis when both the German and British firms are included in the sample. (C) 2002 Elsevier Science B.V. All rights reserved.