Market structure — practice question

Car production is changing. Until quite recently, car manufacturing firms had the strongest market power. At the moment, though, firms making car parts are becoming more powerful. The markets for both cars and car parts include a relatively large number of firms ranging from very large to small. In 2014 the market was led by sixteen major car firms, each of which sold more than one million cars a year. In that same year there were ten major car part firms and these were gaining more power over the car producers. The world’s largest car part supplier by revenue says that it supplies at least one part in every car sold across the world. The firm has expanded through mergers and is moving towards full control of the market. It is trying to build high barriers to entry and become the only producer. The ten largest car part firms made up 63% of total car part output in 2013, producing US$250 billion of car parts in that year. These ten firms now have the capacity to build 85% of a car’s internal systems, leaving the car manufacturing firms to make little more than the engine. Car production is rising in a number of developing countries but falling in some developed countries. Car manufacturing increased in the UK between 2013 and 2014, but the industry had already been facing problems before 2013. In 2008 the average wage of car workers fell. In that year the UK was in recession. Real wages in the UK car industry for the lowest paid workers also declined after 2008 and the number of workers employed fell between 2008 and 2012. This was despite output per worker increasing, partly because some less skilled workers lost their jobs and the industry replaced some of these workers with capital equipment. Car buyers often borrow money from commercial banks to pay for their purchases. In some cases buyers use their savings, which may be taken out of commercial banks, to buy cars. The behaviour and performance of car firms are affected by the economic system of the country in which they produce. In countries with a market system there is likely to be greater consumer sovereignty. Car firms in such countries may be more likely to innovate, introducing new methods of production and developing higher-quality products.