The Competitive Process: Insights from Two Japanese Industries

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The Competitive Process Insights from Two
Japanese Industries
Prepared for the Conference, Promoting
Competition in Developing Economies in Asia

• Sadao Nagaoka
• Institute of Innovation Research,
• Hitotsubashi University
• Masatoshi Kato
• Institute of Economic Research,
• Hitotsubashi University
• April 13, 2008_at_Kyoto

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Purpose of the presentation

• We shed light on the competitive process of two
  Japanese industries to provide some insights into
  antitrust policy and industrial policy in
  developing countries.
• The Japanese oil product industry
• The Japanese motorcycle industry

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Part IThe Japanese oil product industry
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Overview of the Japanese oil product industry

• Heavily regulated until early 1990s
• A series of deregulations, with the
  liberalization of the import of gasoline in March
  1996 as the major final step
• Substantial price decline, even if import has not
  risen, followed by large productivity improvement

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Domestic production of gasoline (thousand kl)
Source Ministry of Economy, Trade and Industry
(METI)
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Imports of gasoline (thousand kl)
Source Ministry of Economy, Trade and Industry
(METI)
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Gasoline prices
Source Nagaoka and Kimura (1999).
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Average capacity of refining plants, by company
(major companies)
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Which plants are closed?
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Total number of employees in refining plants, by
company (major companies)
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In sum,

• Productivity has improved substantially after the
  import liberalization in the refining sector as
  well as in the retail sector.
• Credible threat from potential import competition
  has apparently changed the conduct of incumbents
  from competition through wasteful investments
  into competition through cost reduction.

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Part IIThe Japanese motorcycle industry
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Growth of the Japanese motorcycle industry

• The Japanese motorcycle industry started with the
  production of about 200 motorcycles in 1946, but
  then grew rapidly and became the global leader by
  1960, producing 2 million motorcycles per year.
• The number of firms grew and then declined
  sharply for the first 20 years in the post-war
  era, and consequently the industry evolved to be
  an oligopoly.
• Only four motorcycle firms survive in the
  industry that is, Honda, Kawasaki, Suzuki, and
  Yamaha.

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Industry size (thousand motorcycle)
Source Kato (2008).
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Entry, exit, and the number of producers
Source Kato (2008).
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Who exits and why?

• Exists of lower quality firms, late entrants and
  low volume firm
• Only a firm which can realize sustained quality
  improvement can survive. A firm which can
  appropriate efficiently the cost of investment in
  quality improvement.

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Determinants of firm exit a proportional
hazards model
Source Kato (2008).
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Definition of covariates
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Engine quality (absolute quality)
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Type of exits

• There are heterogeneous exits from the motorcycle
  industry.
• Many business failures
• Buying-out
• In particular, late entrants, Yamaha and
  Kawasaki, expanded their capacity and grew by
  buying earlier motorcycle producers.

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Exits though buying-out
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In sum,

• Market structure has changed drastically as
  innovation and competition process has changed in
  the motorcycle industry.
• The necessity for sustained innovation investment
  was a significant cause of the shakeout of
  producers.
• Buying-out is one of the important aspects in the
  evolution of the motorcycle industry to realize a
  competitive firm structure.

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Potential lessons from two Japanese industries

• Importance of credible potential competition
• Competition policy as industrial policy
• Flexible adjustment of market and firm structure
  to realize the efficiency and gain from
  innovation

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References

• Kato, Masatoshi, Empirical Studies on the
  Dynamics of Industries, Doctoral Dissertation,
  Graduate School of Commerce and Management,
  Hitotsubashi University, January 2008.
• Nagaoka, Sadao and Fukunari Kimura, The
  competitive impact of international trade the
  case of import liberalization of the Japanese oil
  product market, Journal of the Japanese and
  International Economies, 13, 397-423, 1999.
• Yamamura, Eiji, Tetsuo Sonobe, and Keijiro
  Otsuka, Time path in innovation, imitation, and
  growth the case of the motorcycle industry in
  postwar Japan, Journal of Evolutionary
  Economics, 15, 169-186, 2005.