Economics In Action

Current Events: Story and Questions

How an Unpretentious Family Car, the Passat, Got so Hot

By Micheline Maynard

Source:    The New York Times, September 10, 2000, Automobiles Section

Online:   http://www.nytimes.com/library/auto/wheels/091000auto-passat.html

This is a particularly interesting article for me. In the early 1970's I lived in Germany. While there I noticed a Volkswagen sedan called the Passat. When I moved back to the US I visited my local VW dealer and asked about buying a Passat. I was told the VW did not make such a car. Of course I knew better, but realized that the car simply was not sold in the US. Now, nearly 30 years later, the Passat is as hot a sedan in the United States as it was in Germany when it first came out.

In the article it is pointed out that when the Passat was first introduced in the US it was, at best, received moderately well. Now, however, it is a very popular car with a (slight) wait time to order. What happened?

Let's look at this from the viewpoint of supply and demand. Most automobile manufactures create a supply curve that is based on cost-plus pricing. What this means is that the cost of producing the automobile is used as a base, and the selling price is that base plus some markup. It is that markup which is open to negotiation between the buyer and the dealer. The upshot, however, is that to the retail buyer the supply curve is very nearly flat. The buyers can buy as many as they wish (usually one per customer) at a price that is within a fairly narrow range.

This being the case, the real issue in selling a particular model of car is not so much the price, which is very nearly fixed, but the consumer demand. When the Passat was first introduced in the US the demand was fairly low and, as a result not many were sold. VW set out to increase consumer demand with a series of advertisements. While this would increase consumer awareness of the car, it is quite likely that the ads alone would not have made a substantial difference in sales. Something else was needed.

The retail market for automobiles is quite interesting, in that most of the things which influence both the buyer and the seller are out of the control, or even the influence, of either. That is the case here. As you read the article, notice where the credit for the increased demand for Passats is placed. "The Passat has also received uniformly favorable notices in enthusiast magazines and newspaper reviews, and it has won industry awards. This summer, for instance, J. D. Power & Associates named it the 'most appealing family car.'"

It is this shift in demand arising from a change in tastes that is responsible for the increased popularity and sales of the Passat. This is a prime example of an instance where either party to the market does not create the underlying causes of a change in the market for a particular product. Neither the buyers nor the sellers are responsible for this - the market is responding to information and conveying that information to the sellers via the increased demand for the car.

Questions for Discussion:

• Sketch out the demand and supply curves at the introduction of the Passat. Now go back and add the new, higher, demand. Notice that the price is not likely to rise by much, but the quantity sold is likely to increase fairly dramatically due to the flat supply curve.
• Over a longer term, how do you think VW corporate headquarters (not just the local dealer) might react to this shift in demand?
• Think about the incentive for manufacturers to influence the producers of product reviews, such as Consumer Reports or JD Power and Associates.
• Given what you have learned about the general shape of dealers' supply curves for automobiles begin to notice the difference between manufacturers' ads (which seldom make any mention of price) and local dealers' ads, which tout "the best deal in the county." Why might they both be behaving in the ways they are?

Related Text Chapters:

Chapter 3 Supply and Demand
Chapter 18 Demand

Related Articles and Information

Wilcommen in Passat The Volkswagen Passat official homepage

http://www.passat.de/