Review of Industrial Organization 19: 55–69, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Automobiles: The Old Economy Collides with the
JOHN E. KWOKA, JR.
Department of Economics, George Washington University, Washington, DC 20052, U.S.A.
Abstract. The U.S. automobile industry is beginning to confront the next major technology – the
internet. Business-to-business manufacturing systems and supply exchanges, together with business-
to-consumer ordering and purchase systems, all have the potential to bring great efﬁciencies to this
traditional industry. But each of these innovations raises new competitive issues. Internet ordering
will greatly diminish the role of conventional dealers, who have thus far blunted its impact. B2B
exchanges raise concerns about buyer power and other competitive effects. This paper outlines and
analyzes these internet-driven changes and their competitive implications for the industry, its dealers,
suppliers, and customers.
Key words: Auto industry, internet.
The advent of the internet has spawned enormous numbers of new enterprises and
even entire new industries. While these have attracted well-deserved attention,
at least as important to the productivity of the U.S. economy will be how “old
economy” industries respond to the opportunities and challenges presented by the
internet. Nowhere is this creative tension more clear than in the U.S. automobile
industry. This update will analyze how traditional methods of producing and selling
passenger vehicles in this country are being transformed by the internet – what
forces are pushing for change and which are impeding it, and what policy issues
are raised by some of the new methods of doing business.
For most of the last hundred years automobiles in this country were produced
and sold the same way. Auto manufacturers would project demand for vehicles
over the next year or more, and then design and build each model in numbers that
sought to both reﬂect demand and keep plants running near capacity. Major com-
ponents like engines and transmissions were manufactured at various locations and
shipped to often-distant assembly plants. Other parts and components might also
be produced by the company, or alternatively purchased from any of thousands
of suppliers who periodically bid for each manufacturer’s business. Assembly
plants inventoried parts and components in order to keep the line operational at
Gratitude is expressed to Guillermo Petrei for excellent research assistance.