Economy, Domestic Economy

Auto Market: Ending the Oligopoly Scourge

Auto Market: Ending the Oligopoly ScourgeAuto Market: Ending the Oligopoly Scourge

Iran’s automotive market is in the grip of “oligopoly” as the current regulations have significantly impeded competition, said Reza Shiva, the head of Competition Committee, which is the government body in charge of market regulation in Iran.

“The oligopoly in the auto market is evident as 90 percent share of the market is dominated by only two manufacturers that are operating as both car manufacturer and importer,” he added.

Oligopoly simply means the control of a market or industry by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers.

Shiva’s comments came in response to the remarks made by Ahmad Nematbakhsh, spokesman of Vehicle Manufacturer’s Association (VMA who had in a letter to Mohammad Bagher Nobakht, the head of management and planning organization, advised: “The government should stop regulating the auto market and let the market mechanism set the prices.”

Nematbakhsh’s argument is therefore unsound, because an oligopolistic market structure does not allow a fair degree of competition in the market for the free market mechanism to work; thus, balancing supply and demand in such a market is only possible through administration’s intervention.

The Competition Committee’s reasoning that there is oligopoly in Iranian auto market is logical based on several independent analyses. Thus, the committee’s decision to intervene in the market seems to be correct in a market structure that cannot balance the demand and supply by itself. This situation (oligopoly) proves beneficial for inefficient automakers that are earning billions by dominating the import and production channels but works to the consumers’ disadvantage.  

The Competition Committee is a public body responsible for “implementing the rules and regulations outlined in the Principle 44 of Article 4 of the Constitution to facilitate competition and prohibit monopoly”, as mentioned in the committee’s website.

Last week, the Committee was assigned by the ministry of industry, mine, and trade to set the prices for imported cars. The ministry also prohibited the import of cars with engine displacements of more than 2000 cc in order to protect the domestic car industry and reduce fuel consumption.

In addition to these changes, the ministry passed a resolution on January, based on which cars will only be imported through the official representatives of foreign carmakers whose licenses have been registered in the ministry. As reports suggest, more than half of the foreign car imports so far have been through individuals or entities other than the official representative companies.

The automobile industry has been suffering from several difficulties over the past decades, including the unfair competition caused by limitations imposed on international trade, subsidized economy, oligopoly due to privileges granted to some companies, political connections … the list goes on.

Earlier last week, the government’s official news agency, IRNA reported that the average price of imported cars has significantly increased over the past year. The higher average price results from the importer’s obsession with models that enjoy high premium pricing.

Premium pricing (also called image pricing or prestige pricing) is the practice of keeping the price of a product or service artificially high in order to encourage favorable perceptions among buyers, based solely on the price. It is used to maximize profit in areas where customers are happy to pay more, where there are no substitutes for the product or where there are barriers to entering the market.

Experts believe that in light of restrictive market regulations passed by former administrations, oligopolists turned to importing cars suitable for the middle class. While the private and small car importers prefer investing in luxury car markets, large semi-government companies have focused on import of low cost/quality Chinese cars for the middle class.