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An Industry Report on the Airbag Industry

The cost of airbag systems fell dramatically as production ramped up and economies of scale were realized. Automakers employed a variety of strategies in meeting the passive restraint regulation. Once airbags were mandated, some automakers rushed to place airbags across their entire vehicle line, while others introduced the technology more gradually. Increased costs to meet airbag regulation had little impact on the volume and mix of vehicle types offered at the time the regulation went into effect. During the period of regulatory debate, the automotive industry reports forecasts tended to overestimate the future cost of airbags, sometimes intentionally by assuming limited production volumes and atypical amortization schedules, while government and advocacy groups often underestimated costs. The prolonged struggle over the federal government’s passive restraint regulations resulted in compromised rules and vehicle strategies that had a lower benefit-cost ratio than alternative strategies and rules.

In pricing vehicles, automakers handle the added cost of airbags much as they do other new technologies and quality improvements generally. Vehicle pricing is a complex process aimed at achieving the corporate objectives of maximizing profit and market share.

Automakers employ a number of strategies to recoup the cost of a new technology such as airbags. In this case, as shown later, auto manufacturers passed most of the added cost of airbags onto consumers, but not necessarily in a straightforward manner. In general, automakers pass costs incurred by regulation through vehicles that are in higher demand and/or have a higher profit margin. Automakers may recoup the cost over a number of years to avoid price shock. Offsetting reductions in standard equipment (decontenting) on some models and a disproportionate raise in dealer (inventory) cost may be used to mitigate the effects of cost pass-through pricing. Such cost recovery behavior will differ somewhat between unregulated in-demand technologies and regulated technologies that consumers do not value.

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