Do Japanese Automakers Maximize Profits? A Systems Analysis of the Pricing of Automobile Inventories

Abstract

This article investigates Japanese automaker pricing practices on the U.S. market and finds them compatible with short run profit maximization. The short run is here the selling time of a typical inventory holding and short run profit is defined as average per unit of time profit made over this selling time. Maximizing this concept of short run profit implies setting markup over the average cost of goods equal to the inverse of the price sensitivity of inventory selling time. To test for short run profit maximizing behavior, estimates of this price sensitivity for each firm are compared to the actual markups applied by U.S. and Japanese automakers.