~mpirical Case 2

DEMAND CURVES FOR THE SUZUKI

SAMURAI

Suzuki Motor Co. enjoyed impressive sales grow

th of its Samurai model during its first
three years in the U.S. However, during June of
1988, Consumers Union condemned the
Samurai as "no t acceptable" because of its alleg
ed tendency to roll over during sudden
turns. 1 As a result of this negative advertising and
subsequent unfavorable reports both in
the press and on television, 2 unit saies of the Sam
urai for the month of June plunged to
2,199, a 70.6% decline from May 1988 levels.
To counter the negative publicity , Suzuki mounted
its own advertising campaign .3
The company provided taped evidence suggestin
g that Consumers Union's results were
suspect. Moreover, it was argued that safety was
no more an issue for the Samurai thlll
for other similar vehicles. As a consequence of
this effective advertising , Samurai unit
sales increased to 6,327 in the month of July.
Company officials believed that monthly unit sales
could be further improved but
that any such improvements would have to come
through strategic price changes. During
the_latter part of July , Suzuki Samurai tntroduce
d $2,000 in dealer incentives , which
allowed dealers to slash 25% from the Samurai's
$7,995 base price . The result was dra-
matic, with unit sales totaling 12,208 for the mon
th of August. According to Douglas
Mazza, general manager of the automotive divis
ion of American Suzuki Motor Corp .,
"Consumer confidence is back i:n the Samurai".

I. List the sequence of events and the corresponding

price-quantity relationship for
the Samurai from May to August 1988 .
2. From the information you obtained in question
I, graph the demand curve(s)
faced by Suzuki for the period from May to Aug
ust 1988 .
3. Calculate and interpret an estimate of the price
elasticity of demand for the
Suzuki Samurai. Does this estimate make sense?
Explain.
4. What assumptions, if any. did you make in arriv
ing at your elasticity estimate?
5. From an economic perspective, do the nonprice
and price strategie s employed
by Suzuki make sense? Explain .

1Toe 1esl results were published in the: July 1988

issue of CortJumer Reporu.
io0 you remember T ~d Koppel's " Nigh1l ine" progra
m show ing the safety lt:st results ">
""' >An article cn1i1lc:d "Suzuki Lashes Oul al Samu
rai's Cri1ics, Calling Testing of Vehic le Disto
appeared in the June 10. 19118 issue of the: Wall ned"'
Strut Journot.

150

I
 CJwpta 5 I Estimation of the Demand Functio,, /87

where £lo, ai, a2, a3, a4, and a5 represent the parameters to be estimated using a statistical
n:gression software package. RPR is the deflated retail price of gasoline, and e is the error
tenn in the model, assumed to.possess all of the conventional statistical properties. Table
1 preser ts the data to be used in the estimation.

QUESTIONS

I. Using economic theory, what are the hypothesized signs of the parameters (a , a • a • a , a,,
0 1 2 3
a 5) in the model? Explain.
2. Using the results from your regression analysis, are your estimated parameters statistically
significant? Compare your hypothesized signs (Question 1) with your estimated signs. If there
are any discrepancies, provide an appropriate explanation.
3. Using 1987 data, what are your estimated elasticities with respect to each independent vari-
able? Interpret each elasticity.
4. Recall that the government made the claim that for every one cent of tax on gasoline there
would be Sl billion increase in tax revenue. Use your estimated model to support or refute the
government's claim. · _
5. Can you think of any direct or indirect negative effects associated with the gasoline tax? Can
these explain why the government has been reluctant to raise the r.ax? Explain.