Iranian automotive industry and global economy:

Future study based on game theory

Ebrahim Nabiuny, Reza Madjidzadeh, Monir Sadat mirjamali Mehrabadi
and
Sohaila Alahverdizadeh
Jihad Daneshgahi, Markazi province, Iran

Key words
Game theory, chaotic trends, automotive industry.

Abstract
Being one of the main drives of Iranian industrial development, automotive industry has been received
government extensive attention in order to become competitive. There are many backward and forward linkages
between automotive industry and other industries because of technical and structural properties of that. Thus
development of Iranian economy is closely related to the competitive advantage of Iranian automotive industry. This
paper tried to develop a primary forecast of industry future equilibrium and trends under the condition of non-
government protection based on chaotic learning in game strategies. Forecasting possible equilibrium lead us to
improve strategic behavior and establishing the win-win situation.

Despite the adoption of some network strategies in Iranian automotive industry, there is still a single nature
and because of activity in low – risk with middle income, this industry does not have the ability to compete in highly
competitive markets. More investment on the national car with quite unique coordinates and quality and prepare the
low risk financial resources are the needs of the industry in the global economy.

Introduction
It is essential to do futurology studies in order to evade passivity and choosing appropriate
strategies for having the proper position. Iran's automotive industry is one of the countries industrial
development strategic choices. Hence an analysis of automotive industry and its presence in the world
economy was offered from the viewpoint of play theory. It is supposed that changing methods of
production and stockpiling as chaotic transition were accepted and each vector has its own strategies.
Domestic automotive industries in order to gain the merits of competition in world economy should
change from semi-ford structure and internalize innovation; besides, it is essential to approach reliable
methods for securing wealth and capital. In first part, there is a description about play theory; the second
part is devoted to theoretical analysis of competition in world economic process which leads to the
conclusion.

Manufacturing method change in auto industry

The oil shock in 1970,s concluded in renewal of automotive industry structures. Ford
manufacturing method, which was organized in the form of mass and focused manufacturing, was
replaced by Japanese Toyota method. Before 1970s American auto manufacturer had entered the majority
of auto markets. The Americans' learning process did not coordinate with changes and fluctuations.
Japanese manufacturers by focusing on petrol consumption and managerial methods for lowering the risk
of price fluctuations notably entered the markets held by the Americans.

Consumerism positive feedback loop in the American society together with the negative feedback
loop of the need to develop the market share for preventing the decline of interest's rate, caused the
learning process of American auto manufacturers in choosing manufacturing structures does not spin on
the axis of productivity and management change. from the intricacy viewpoint the grid manufacturing
system in automotive industry, namely focused manufacturing within the three last decades, has created a
very different situation from individual factory balances and manufacturing lines. In fact the distance
between the two close points in 1970,s which one belongs to ford stockpiling and the other to Toyota, has
increased superficially. Toyota manufacturing method expands manufacturing process in regions with
cheaper institutions. The current transition toward world digital economy doesn’t show any significant
distance but gradually it will go up apparent development properties moves away from Toyota
manufacturing method. In fact by chaotic transition to new manufacturing methods the characteristics of
position vector and the interaction type will change. In ford's era the strategies were sheer confrontation
and the battle of a few certain trade marks in Toyota method, new ways of granting license on the
condition of closed borders and sufficing to low income markets will be more efficient. In globalizes
digital economy the severity of competition and the fragility of relying on old methods will increase. The
dynamics of new structures will be analyzed later. In case of globalizes economy, our country's
automotive industry will enter a serious competition even in domestic markets. Simulating the
competition process in the world market of server competition will help us identify the possible
vulnerable points of domestic automotive industry.
Within the framework of the falcon and dove classic model, in order to model free competition for
entering markets and finding a stable position, two kinds of auto manufacturers can be specified the
doves which follow non-aggressive strategies, namely the institutions which seek low risk markets with
average productivity and the prices which are quite low. Such investment, which is usually made in less
developed markets, will end in an average value for the institution but there is no negative long term
effect on market's total risk. On the other hand the falcons follow aggressive strategies. Institutions
working in severely competitive markets with higher risks are of this type. When selling products, falcons
move aggressively and the investment caused by their activities has the confusion potential in the
market's stability. Both institutions fight for attracting the regional customers with average salaries. If both
fight for a single market there is the possibility for both to be falcons, doves or a falcon and a dove.
If a falcon and a dove fight for a market, the falcon will win because it offers quality various
products which cost more. If two doves confront each other the market will be shared equally because it is
supposed that both have the same offering for sale. If two falcons fight because of their similar
characteristic the market will be shared equally, but the productivity of all the players in all three cases is
rather different and has two parts.
The first part of the analysis is devoted to added value. The added value depends on the expected
productivity of the amount of need for the institution product. In first case the dove didn’t have a sale and
gained nothing while the added value over ph is earned by the falcons. In second case the total demand is
shared between the two doves and they gain the average added value of P m. in third case again the
demand is shared and both falcons gain half of the added value.
The second part includes the cost of the competition between the two players on a single investor.
This parameter is very important due to world economic situation. In first case an aggressive auto
manufacturer encounters non-aggressive ones. So there is no fight because the non- aggressive auto
manufacturer is has committed himself to his conditions and expected productivity is preferred.
Aggressive auto manufacturer has no reason to start fight and can sell the product. In second case there is
no fight again because the market is shared between the two auto manufacturers. As a result there is no
cost for first and second case. It two aggressive auto manufacturer struggle for more market share they
would start fighting. On one hand the prices may come down as a result; on the other hand products with
more expected productivity and higher covert risk will emerge. Parameter d shows all these effects.
Likewise both aggressive auto manufacturers gain half of the subtraction of the value and costs. The factor
cost introduces the degree of falcon's aggression and it is also the risk of the falcon's fight which will lead
to the fragility cased by the covert risk. In table 1 productivity matrix is offered briefly.

A
Falcon Dove
B
 Ph  d Ph  d 
Falcon  ,  Ph , O 
 2 2 
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  Pm Pm 
Dove O, Ph   , 
 2 2 

Table 1: the productivity matrix of the auto manufacturers A and B within the framework of falcon and
dove play. The definition of the parameters comes as follows ph: added value over sales d: dissatisfaction
caused by the confrontation and Pm: average added value of sales.

In order to ensure the above table coordinates the falcon and dove play structure parameters in table one
Ph  d
should apply to this non- equation Ph  Pm  0  . It means that dissatisfaction d is less than the
2
added value over sales

Theory of falcon and dove development play

The two players' symmetrical play with n strategies  is as follows:

Two players' play: 

 : A, B, S  S ,$̂ 
Combined strategy: S  S1 , S 2 ,...., S n   S

 $11 $12 $ 1n 
 
 $ 21 $ 22 $ 2n 
Productivity matrix (1): $̂  
... ... ... 
 
$ $ nn 
 n1 $ n2

To describe chronological development of the play's frequent version  , reproduction dynamics

will be offered. Reproduction dynamics which are in the form of differential equations, define the

population evolution method within time x : x1 , x2 ,...., xn  each element xi  xi t , i  1,2,...., n  is
specified to describe time evolution of the fractions of different types of players i in whole population and

the player with type i is a player who follows si strategy. Population vector x should secure the condition
for normalizing the single vector:

n
xi t   0, i  1,2,..., n, t  &
 x t   1
i (2)
i 1


The following equation systems from population vector x t   x1 t , x2 t ,...., xn t  are known as
reproduction dynamics. (Web, 2009).

 
dxi t  n n n 
 xi t  $ il xl t    $ kl x k t xl t  (3)
dt l 1
  l 1 k 1
  
 : f i t  : f t  

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 f i t  shows type i estimate and f t   n f t  shows the estimate of the total
In the above formula i1 i
population the formal description is limited to two strategies 
i  1, 2  H , D 
because of definition z

population vector x t   x1 t x2 t  can be delivered to a single element  xt   x1 t x2 t   1  xt 
and equation 3 is simplified as follows:

dx
dt
   
 x $11  $ 21  x  x 2  $ 22  $12  1  2 x  x 2 
By putting the parameters of productivity matrix of falcon and dove we reach to the following differential
equation:

 1   
  ph  pm  d x 3   p m  p h  d  x 2   p h  p m  x
dx 1 3 1
(4)
dt 2  2 2   2 

In order to show the consequences of equation 4 and to interpret and describe the fundamental
characteristics the falcon and dove play productivity parameters in table 1 have been put in 3 different
parametrical set.

Collection Risk of
d Ph Pm
parameters unstable

P1 Low 10 a b

P2 Average 50 a b

P3 High 100 a b

Table 2: hypothetical parameters of three different sets from fundamental productivity matrix used in
modeling investment market of falcon and dove play.

In parametrical sets high and low added value of sales is constant Ph  a, Pm  b  but the cause of
instability is variable d. in parametrical set P1 the instability risk is a little more than high added value
d  10 in parametrical set P2 the average vale of instability cased by the fight is the average (d=50) and
in parametrical set P3 is quite high (d=100).

Population fraction development x (t) of falcons in falcons and doves population is most important
in analyzing future trends of the market. x (t) as a function of time is shown for parametrical set P i in
 19 
which by using different fractions of falcons in zero time  x0 
1 2
, ,...,  have been calculated as
 20 20 20 
algorithm. All population curves converge toward the limit x L : xt   .

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 After a time period the fraction of falcons for the parametrical set P 1 will end in x L  0 / 50 namely
the population of falcons and doves will be stable as long as more than 50% are falcons and fewer are
doves. Although the difference between Ph , Pm is beneficial for the second the ratio of falcons will be
greater and the competition will be more sever. Within such situation the play theory prognostigate that
the number of risky auto manufacturers (falcon strategy) quite high (more than 50 percent) as a result the
fraction of auto manufacturers with average productivity and low risk is less than 50%. To understand the
simulated results, the concept of strategy with development stability is introduced briefly as follows:

A) s , s * *
 is the Nash equilibrium of the play
 
B) $s, s   $ s , s , s  r s , s  s

 
 

The function r s   is the best reaction to strategy s

 * and $ (s, s) describes generalized combined
strategic productivity function. So it is essential that stable development strategy s * becomes a
symmetrical Nash equilibrium of the play while the non-equation B should be secured for each strategy
belonged to the best reaction set s* namely s  r s   . To explain this definition we limit the number of


A
mere strategies to n=2 and use productivity matrix in table 1. x : s1 Shows the possibility of adopting
B
aggressive strategy B falcons by player A and y : s1 shows the possibility of following the falcon
strategy by player B. thus the combined strategy productivity function will have the following structure:

$x, y   $11 xy  $12 x1  y   $ 21 1  x  y  $ 22 1  x 1  y 

Ph  d P (5)
 xy  Ph x1  y   m 1  x 1  y 
2 2

Because of changing the form of variables x  y, y  x player A's productivity namely

$ x, y   $x, y  and player B as a result of the symmetry become equal.
A

$ A x, y   $x, y  , $ B x, y   $x, y 

So the two necessary conditions to prove a Nash equilibrium x , y   

 in two players play with two
strategies will reduce to one condition (21):

 
$ A x  , y   $ A x, y    x  0,1

 
$ B x , y   $ B x , y   y  0,1


 $ x  , y   $ x, y     x  0,1 (6)

This play has three Nash equilibrium. Two balances of x  1, y  0 ˆ H , D and
x  0, y  1 ˆ D, H  are asymmetrical and one of them namely combined strategy Nash equilibrium

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 P  2 Ph P  2 Ph 
 x  m ,y  m  is symmetrical. Definition 6 necessitates that in each balance the
 Pm  Ph  d Pm  Ph  D 

function  : $ x , y
 
  $x, y  should be positive for all x  0,1.


With non- technological language economy globalization which will lead to more competition
between each field of activities is the bases of formation of fight between doves and falcons. Even if dove
auto manufactures do not have the tendency to enter the falcon's market the movement by falcon's capital
and the desire for entering more markets, will lead to more confrontation between two types of
institutions in automotive industry. In such a case all the auto manufacturing institutions which are
dependent on government support will be made to fight the falcons in form 3 of doves. In order to survive
institutions supported by government (doves) should incline toward markets which have less operation
risk namely they are less competitive. But markets with such characteristics in auto manufacturing
industry belong to countries which have high potential risk and in long term period they have serious
political fluctuations, thus they are not a good long term choice unless the doves incline toward complete
flexibility in manufacturing and lowering the cost of dependence on supplement chain until the
fluctuations covered.

On the other hand chaotic transition from Toyota manufacturing method to knowledge – based
digital manufacturing method has caused some internal paradoxes in stockpiling method. The amount of
dissatisfaction and heterogeneity in comparison with ford and early days of Toyota (competition was
merely based on prices and outward characteristics) has increased significantly. As Tapscott (1995)
indicates presumption in digital economy, entering customers in designing and manufacturing and
making investments are among the factors for the distinction which have made the competition more
difficult. Expanding exchanges to virtual space and the high rate of moving financial sources in virtual
space to compete with actual capital of manufacturing sector will be followed by sever decline of the
potentials to secure financial sources of projects and high cost of the fight: Hence Iranian auto
manufacturers , beside their efforts to internalize innovation in their products like international auto
manufactures, have to think of reliable financial security namely rely on low risk capital sources Iran's
automotive industry structure, in content, has the ford focused structure, auto manufacturing institution
should go toward distributing their supplying chain regions having cheaper deposits and make their
efforts to internalize transferring knowledge.

Conclusion
Future of economy will be severely competitive and its characteristics is notably different from Ford
and Toyota manufacturing method the form of the competition and adapting play strategies will also
change for each method sheer competition between grade marks in Ford manufacturing method will be
replaced by economy in which the players strategy is a combination of competition and coordination.
Grid economy is on the verge of transition toward world economy which is competitive and digital. In
this type of economy virtual capital is competing with actual capital and such an opposition will end in
fragility of manufacturing structure. As a result the most important aspects of strategy in new markets
especially in automotive industry will switch to efforts for internalizing innovation and devising methods
to evade financial breaking down. Despite adopting some grade strategies, Iran's automotive industry still
has a Ford identity. Because of activities in low risk regions with average salary. It doesn’t have the ability
to compete in competitive markets. More investment on national automobiles with unique quality and
characteristics and low risk financial facilities are among the necessities of the industry in world economy.

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References
Web, James (2009) plays theory, decisions interaction and development translated by Majid zadeh, Reza,
Mahdi Rezaei publishers. (in Persian)
Majid zadeh, Reza (1999) play theory and economical analysis Mahdi Rezaei publishers. (in Persian)
Skyrms, B (1992) Chaos and explanatory significance of equilibrium, Biennial Meeting of the philosophy of
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Top Scott, D (1995) Digital Economy, McGraw-Hill.
Cournot, (1897) Researches into the mathematical principles of the theory of wealth, New York, McMillan.
Bertrand, j. (1883) Theories mathematique de la richesse social, Journal des Savants 499-508.

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