Vertical differentiation, quotas, and profits: Voluntary export restraints on Japanese automobiles.

This dissertation is composed of three essays on the effect voluntary export restraints (VERs) had on the profitability of firms in the Japanese auto industry. The first essay explores theoretically the effects of output constraints on the profits of constrained firms. The automobile industry is modeled as an oligopoly with firms choosing the quality and quantity of automobiles to produce. The analysis shows that the effect of output restraints on the profits of constrained firms depends crucially on the response of the unconstrained firms. When products are vertically differentiated and firms are able to adjust quality, the constrained firms will either expand output moderately or may even reduce output which creates the possibility of higher profits for all firms due to the resultant increase in prices. The second essay is an event study examining the stock prices of Japanese automakers during the negotiations and announcement of the initial VER agreements with the US and West Germany and Belgium in 1981. The results indicate that the profits of most of Japan's nine producers of passenger cars rose as a result of the VERs, particularly those of Toyota, Nissan, and Honda. Both this empirical work and the theoretical analysis of the previous essay suggest that VERs benefited US and Japanese automakers. The third essay examines the nature of the vertical relationship between Japan's automakers and their suppliers. A change in policy, such as the application of VERs, that increases the profits of downstream firms, might also benefit upstream, supplying firms if they receive a portion of the windfall profits. Theory suggests that the more closely bound the automakers are to a supplier, the more able the supplier is to bargain for a share of the total profits. An event study is conducted indicating that suppliers that produced specialized parts or services received a larger share of the windfall profits than those that produced nonspecialized parts and the latter might have even suffered lower profits due to the trade policy. VERs certainly increased profits for some firms in the Japanese auto industry but the effects were not uniform and many suppliers were probably made worse off.PhDEconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/105275/1/9116285.pdfDescription of 9116285.pdf : Restricted to UM users only