NSF-BSF: Collaborative Research: Market Conduct in Technology Adoption in the Automobile Industry

Abstract Antitrust enforcement research has mostly focused on price and quantity collusion, even though antitrust law encompasses more ways to collude. This project will explore the causes and welfare consequences of automakers colluding on the adoption of emission control technologies. The project focuses on automakers that have been alleged to have colluded on adopting Diesel Exhaust Fluid (DEF) tanks that were too small to effectively clean up nitrogen oxide (NOx), a major contributor to air pollution. The project will investigate how the alleged collusion by automakers concealed violation of NOx emissions regulation. The project will quantify the effects of the alleged collusion on NOx pollution damages, car buyer surplus, and firm profits. These effects inform the proper amount of antitrust penalties to remedy welfare damages of such collisions. Finally, the project will examine whether and how environmental and antitrust regulation can mitigate inefficiencies from technology collusion. The project will build and estimate a structural model of consumer vehicle demand and automaker technology choice, and simulate counterfactual policies. The project utilizes a comprehensive new data set on vehicle prices, sales, and characteristics. A novel feature of the employed structural model is that the probability of non-compliance detection for one firm depends on other firms' behavior as well as its own. A more dispersed distribution in choices may cause a regulator to question why some firms need to use large DEF tanks while others apparently manage with small tanks. By coordinating on small tanks, the automakers simultaneously reduce the probability of being detected by the regulator and make their vehicles more attractive to car buyers (as the tank reduces cargo space, a valuable vehicle feature). With the model and estimates of consumer tastes and automaker costs, the project will conduct counterfactual simulation to explore the following issues: (i) quantify the benefit of strengthening the enforcement of emission standards; (ii) calculate the anti-competitive damage of technology collusion compared to the competitive counterfactual; and (iii) identify the demand and supply conditions most conducive to technology collusion. The project advances the economics research and has regulatory and policy implications on firm collusion, antitrust enforcement, and industry standards. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.