For profit or for market share? The pricing strategy of Japanese automakers on the US market

The rapid penetration of the U.S. automobile market by Japanese automakers has raised questions about Japanese versus U.S. pricing practices. Is it true that ''Detroit is following the old rule...maximize profits on each car rather than sell more cars'' (Wall Street Journal 1/8/85) while Japanese firms seek expansion even if it comes at the expense of profitability? Or could it be that Japanese penetration of the U.S. market is compatible with short run profit maximizing prices? To examine Japanese pricing behavior on the U.S. market, the short run is defined as the selling time of inventory on hand. Maximization of average profit over that period leads firms to set markup over average cost equal to the inverse of the price elasticity of the selling time of inventory. This elasticity is estimated using data on Japanese inventories in the U.S., and compared to markups applied by the Japanese. The evidence suggests that Japanese automakers did indeed price to maximize short run profits on the U.S. market. (C) 1997 Academic Press.