Potential Competitive Effects of Shifting to a 

Vehicle-Only Emission Standard for Phase 2 GHG 

Standards for Heavy-Duty Trucks

David Harrison, Ph.D.

Carl McPherson

Presentation to U.S. Office of Management and Budget

April 21, 2015
1

NERA Study Context: Key 

Elements of U.S. Truck Market

 Large number of vehicle types (18-wheelers, garbage 

trucks, fire trucks, etc.) and smaller number of engine types

 Mix of competitors include integrated (engine-vehicle), 

engine-only, and vehicle-only manufacturers

 Vehicle-only manufacturers—i.e., those with no engine or 

powertrain capability, including many relatively small 

firms—compete with integrated manufacturers through 

access to engines from engine-only manufacturer

 A given engine design/calibration is used in many 

applications by many customers (including vertically 

integrated as well as vehicle-only manufacturers)
2

NERA Study Objectives

 Overall objective: evaluate the potential competitive 

effects of a shift to “vehicle-only” approach for Phase 2 

emission standard

 Step 1: Qualitative assessment based on potential concerns

 Step 2: Quantitative “bounding” estimates based on 

simulation models

“regulations that increase market power for selected entities should be 

avoided” – OMB Circular A-4, p.4-5
3

Qualitative Assessment of 

Potential Competitive Effects

 Economic literature: “strategic” use of regulation to 

impose costs on competitors can harm competitors 

and consumers (price increases)

 Shift to vehicle-only approach provides potential 

competitive advantages to integrated manufacturers by 

imposing costs on non-integrated competitors

– Could set “de facto” engine emission standards on their engine 

competitors who are currently also their suppliers, raising costs for 

engine-only manufacturers (technology, uncertainty, capital costs)

– Higher engine costs and higher certification costs would 

disadvantage vehicle-only manufacturers

 Potential market/societal welfare impacts

– Greater market control by large integrated manufacturers

– Higher vehicle prices and fewer vehicle alternatives
4

“Bounding” Estimates of Effects 

on Concentration and Prices 

 Illustrative estimates developed for three segments

1. Transit buses

2. Tractors

3. Refuse trucks

 “Bounding”: non-integrated firms leave (merger or exit)

– Mergers lead to incentives to raise prices (due to “diversion” of some 

sales to merged partner)

– Exits lead to increases in market concentration and resulting price 

increases (oligopoly)

 Two models used in DOJ investigations

1. “Simple Model” (Shapiro 1996) to predict price impacts of merger

2. “Market Model” (DOJ Antitrust) to predict concentration and price 

impacts of market exit
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Illustrative “Bounding” Price Effects 

of Mergers in the Simple Model

 Illustrative mergers of Integrated and Non-Integrated 

companies show substantial price increases

Price impacts of mergers depend on the merged party and on the nature of 

the “demand system” Demand System Firm A (Int.) B (Int.) C (Int.) D (Int.)

Z (Non-Int.) 16% 3 % 2 % 6 %

Merging Party 9 % 5 % 5 % 6 %

Z (Non-Int.) 114% 12% 7 % 25%

Merging Party 40% 21% 20% 25%

Post-merger Price Increases in Refuse Segment

Z (Non-Int.) merges with

Linear

Constant Elasticity

Brand A (Int.) W (Non-Int.) B (Int.) X (Non-Int.) C (Int.) Y (Non-Int.)

Linear 2 % 3 % 6 % 4 % 11% 2 %

Constant Elasticity 7 % 11% 23% 13% 61% 6 %

Post-merger Price Increases in Transit Bus Segment

Merger of A and W Merger of B and X Merger of C and Y

Demand 

System
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Illustrative “Bounding” Concentration 

Effects of Exit in the Market Model

US Department of Justice guidelines note that HHI levels above 2,500 and 

changes above 100 “raise significant competitive concerns” (p. 22) 

 Herfindahl–Hirschman Index (HHI) is a common measure 

of market concentration (sum of squared market shares)

 Exit of non-integrated firms would increase market 

concentration

Market Elasticity Transit Bus Segment Tractor Segment

0 599 417

-0.5 651 465

-1 705 511

Note: Results shown with specified own-price elasticity -5.

Change in Final Vehicle Segments HHI
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Illustrative “Bounding” Price Effects 

of Exit in the Market Model

 Exit of non-integrated firms could lead to substantial 

price increases

Price impacts of exit by non-integrated firms depend on overall market 

elasticity and price elasticity for exited firm

Market Elasticity Transit Bus Segment Tractor Segment

0 54% 14%

-0.5 50% 13%

-1 45% 11%

Average Percent Change in Final Vehicle Prices

Note: Results shown with specified own-price elasticity -5.
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Conclusions

 Sound conceptual basis for concern about the welfare 

effects of removing the separate engine standard (“use 

of regulation to raise competitors costs”)

– Adverse welfare effects include increases in market concentration 

and market prices for trucks 

 “Bounding” estimates use simulation models to predict 

effects if non-integrated firms leave (merger or exit)

– Results show market concentration effects that DOJ indicates would 

“raise significant competitive concerns”

– Results for market price increases vary widely but simulations show 

they may be large

 Sum: qualitative assessments and “bounding” 

estimates suggest potential adverse effects of switching 

to a vehicle-only truck emission standard
David Harrison, Ph.D.

Senior Vice President

NERA Economic Consulting

Boston, MA 02116

+1 617 927 4512

David.Harrison@nera.com

Carl McPherson

Research Associate

NERA Economic Consulting

Boston, MA 02116

Carl.McPherson@nera.com