An Economic Analysis of Toyota Corolla
Sales in the U.S. Market
1. Introduction
The Toyota Corolla, which is well-known for its dependability, affordability, and fuel efficiency,
is among the most well-known small cars in the US market. In a dynamic automotive landscape
where fuel prices, competitive strategies, and economic conditions are constantly changing, it is
critical for both automakers and policymakers to understand what drives Corolla sales. What are
the main economic factors influencing Toyota Corolla sales in the US market? is the main
research question for this project. This entails assessing how changes in consumer income, fuel
prices, the cost of near substitutes, and the price of the Corolla affect demand. Because of the
Corolla's widespread appeal among all income levels and its reputation as a fuel-efficient car, an
economic analysis of these aspects provide valuable insights into consumer behavior and market
dynamics.
2. Competitor Section
The Toyota Corolla is a competitor in the fiercely competitive small car market, which has a
number of well-known rivals.
Honda Civic – Main Competitor
The Toyota Corolla's closest rival is the Honda Civic. These two small sedans are comparable in
terms of cost, functionality, and dependability. While the Corolla prioritizes efficiency and
simplicity, the Civic frequently competes on sportiness and design innovation. Both models have
historically sold well together, and because they are interchangeable, any change in the Civics’
price can have a big impact on the demand for the Corolla.
Ford Focus
The Ford Focus was a formidable rival in the small car market before it was phased out in the
United States after 2018. Customers looking for an alternative to the Corolla chose the Focus
because of its sporty performance and attractive design. Although it is no longer a direct rival, its
historical impact influenced competitive benchmarks and market expectations.
Nissan Sentra
The Nissan Sentra provides a cost-effective and design-focused substitute. It caters to younger,
cost-conscious customers. Although it usually has lower brand loyalty than Toyota or Honda, it is
still a viable alternative in terms of demand analysis. Corolla's price sensitivity and clientele may
be impacted by modifications to Sentra's incentive schemes or pricing.
Hyundai Elantra
With aggressive marketing, cutting-edge technological features, and one of the best warranties in
the market, the Elantra sets itself apart. Cost-conscious consumers find it appealing due to its
strong features-per-dollar ratio and lower base price. Its existence forces Corolla to maintain
competitive pricing and modern technology.
Kia Forte
A new rival that strikes a balance between affordability, contemporary style, and excellent fuel
economy is the Kia Forte. Sales of Kia have been increasing steadily in recent years, and the
company's value-driven approach appeals to similar market segments as the Corolla. As an
alternative, its pricing may also affect demand for Corollas, particularly in market segments
where consumers are more price sensitive.
3. Objectives
The following goals are intended to be achieved by this study:
1. Calculate the Toyota Corolla's price elasticity of demand, which measures how responsive
customer demand is to price fluctuations.
2. To assess how rival brands affect Corolla sales, examine the cross-price elasticity of demand,
especially with regard to the Honda Civic.
3. Determine whether the Corolla is a normal, subpar, or luxury good by analyzing the effect of
consumer income on sales.
4. Based on the idea that higher gas prices make fuel-efficient cars more appealing, calculate the
impact of gas prices on demand for Corollas.
5. Develop a fundamental understanding of market dynamics in the U.S. compact car segment by
utilizing economic theory and empirical data.
4. Literature Review (Theoretical & Empirical)
Demand Theory
The following fundamental ideas of demand theory are used in this study:
According to own-price elasticity, if all other factors stay the same, a price increase for Corolla is
likely to result in a decrease in the quantity demanded.
Cross-price elasticity measures how the demand for the Corolla reacts to shifts in the cost of
alternatives, such as the Honda Civic.
Income elasticity assesses whether an increase in income results in a decrease in demand for an
inferior good, an increase in demand for a normal good, or no change at all.
- For consumers who base their decisions on fuel economy, gas prices can be a significant cost-
of-ownership consideration.
Theoretical Expectations
Variable Theoretical Relationship with Corolla Sales
Corolla Price Negative (own-price elasticity)
Honda Civic Price Positive (cross-price effect)
Income Positive if Corolla is a normal good
Gas Prices Positive (fuel-efficient car becomes more
attractive)
Empirical Studies
- Using market-level data, Berry, Levinsohn, and Pakes (1995) investigated automobile demand
in the United States and discovered that demand for compact cars is extremely sensitive to
changes in prices and pressure from competitors.
- Fuel prices have a big impact on consumer choice, as Busse et al. (2013) showed. Higher gas
prices increase demand for fuel-efficient models like the Corolla.
Goldberg (1998) demonstrated that, although not as sharply as luxury cars, demand for small and
mid-sized cars like the Corolla tends to rise in tandem with income, making them normal goods.
- Using discrete choice models, Train & Winston (2007) found that while perceived quality and
brand loyalty are significant, price and fuel costs continue to be the most important considerations
when buying a car.
5. Market Structure & Demand Concepts
Monopolistic competition governs the U.S. auto industry, especially the compact
segment. This market structure is typified by a large number of vendors selling
comparable but distinct goods.
Product differentiation via design, warranties, technology, and branding.
Although capital-intensive, market entry and exit are comparatively simple.
Advertising and brand positioning are examples of non-price competition.
Reliability, high resale value, and nationwide dealer support are how Toyota sets the
Corolla apart. Demand is more elastic than in monopolistic or oligopolistic markets
because consumers frequently compare different brands in spite of this differentiation.
The following microeconomic demand models are relevant in this context:
Qd = f(P_Civic, P_Corolla, Income, and Gas Prices)
This formula illustrates how the Corolla's quantity demanded (Qd) varies with its price,
rival cars' prices, consumer income, and gas prices.
References:
1. Berry, S., Levinsohn, J., & Pakes, A. (1995). Automobile prices in market
equilibrium. Econometrica, 63(4), 841–890. https://doi.org/10.2307/2171802
2. Busse, M. R., Knittel, C. R., & Zettelmeyer, F. (2013). Are consumers myopic?
Evidence from new and used car purchases. American Economic Review, 103(1),
220–256. https://doi.org/10.1257/aer.103.1.220
3. Goldberg, P. K. (1998). The effects of the corporate average fuel efficiency
standards in the U.S. Journal of Industrial Economics, 46(1), 1–33.
https://doi.org/10.1111/1467-6451.00058
4. Train, K., & Winston, C. (2007). Vehicle choice behavior and the declining
market share of U.S. automakers. International Economic Review, 48(4), 1469–
1496. https://doi.org/10.1111/j.1468-2354.2007.00463.x
