Profit margins  

Kevin Drum has this interesting observation/question about SUV profit margins:

So I watched 60 Minutes tonight, and in the segment on SUVs I heard once again about how the profit margin on these vehicles is anywhere from $5,000 to $10,000 or more. This compares with ordinary cars, which we are lead to believe are practically sold at a loss.

I've heard this so many times that it must be true, but what's the explanation for this? The same companies compete in both the car and the SUV market, so shouldn't competitive pressures force the profit margins to similar points? Isn't that how this whole free market thing is supposed to work?

For one thing, the competitive pressures at work here probably not the same as those in perfect competition, which is the model that usually pushes profit margins down. The market for cars and SUVs is probably more like an oligopoly, where firms react to other firms' prices in setting their own. This leads to an equilibrium, but it isn't necessarily profitable for the ologopolists... that depends on how the firms' cost structures match up. I posted last week about the anti-trust class action suit over milk in Chicago, which is a classic case of oligopolistic competition on price: Dominick's and Jewel were eacting to each others' prices in a way that made it seem like collusion, when actually (or at least, this was the verdict) they were just competing. Competition in oligopoly often seems like collusion, precisely because prices don't act like they would in perfect competition.

If it's true that cars aren't profitable, that could also be the result of an oligopoly situation, although I don't have any explanation for the differences between the markets for cars and SUVs. But SUV's are a different kind of product, so demand is probably different. That would affect the profit margins regardless of the supply-side.