Innovation in the Driver's Seat: The Economics of Modern Automotive Technology

Ten years ago on your family vacation, someone might have been trying to fold a paper map incorrectly while listening to a bad radio reception. Now ten years later, your vehicle will take you from the left to the right lane; brake for you (and maybe even before too); and connect to the internet before you have had a chance to put your seatbelt on. The transition of the automotive industry from mechanical to digital has been incredible and represents one of the more significant economic stories of our lifetime today.

Safety Technologies and Economic Externalities
The modern vehicle's safety features do not just provide safety for the driver, but provide additional safety benefits within the automotive industry that create positive externalities within the economy. Automatic emergency braking, pedestrian detection, and blindspot monitoring consequently reduce accident rates, ease pressure on the NHS, and lower the monetary costs of accidents and injury. When there are safety aspects of an innovation that extend beyond the individual who is purchasing a product, these products will not be adequately provided if left to the private sector. For this reason, many European governments passed industry-mandated legislation to set safety specifications and requirements — because if left to just the private sector manufacturers would have produced less safe products than society would have needed. This is a classic example of market failure being corrected by means of regulation that students and is relevant to students and industry experts.

Technology Innovation, Competition and Economies of Scale
The decreasing cost of technology in the automotive industry is another important point. Battery systems, software algorithms and self-driving vehicles all require significant amounts of upfront investment; however, with respect to economies of scale, when manufacturers are at capacity, the individual cost per item has decreased by significant amounts. Example: Between 2010 and 2023, Tesla was a leader in bringing down the cost of lithium-ion batteries by over 90%. There is now significant competition among traditional vehicle manufacturers and not just their competitors, but also between them and new-age automobile manufacturers who develop their vehicle as a software platform first, and then as a vehicle. Also via creative destruction, innovation has accelerated significantly compared to the era when a traditional oligopoly dominated the automotive industry, thus benefiting the consumer.

Apps, Rewards, and Digital Engagement
One of the biggest changes that people have ignored is how individuals interact with cars long before anyone gets in one. The surrounding technology ecosystem to car culture – apps, competitions, rewards and communities on-line – has become an important economic force by itself. The importance of this is that it contributes to how demand for cars is created and how companies compete for customer loyalty. Companies that use platforms to reward interaction provide economies of scope through network effects, and as the user base grows, the benefit to each participant increases.

The Best of the Best App (BOTB App) is a good example of how all of this works. Every week, BOTB runs competitions in which someone could win their dream vehicle. BOTB provides individuals with free competitions to have an opportunity to participate in the competition and provides them with the opportunity to view cars on the Internet at no cost. The BOTB app provides an individual with a daily opportunity to make this part of their routine – gamifies the experience and incentivises users to return regularly. Economists will find this to be very compelling: through creating a platform rather than traditional advertising, BOTB has generated brand equity through building customer engagement – and this is a fundamentally different model for creating demand and indicates a broader change in how consumer markets function in the digital age.

For economics students, the new car has many more characteristics than simply being a car. The car can be viewed as a software application, a source of data, a means of providing safety, and a point of culture that will impact how people interact daily through digital means. The automotive sector presents as a real-time, living laboratory that demonstrates positive externalities from safety technologies, economies of scale in battery manufacturing, network effects in digital platforms, and competitive disruption through creative destruction. The future will be more connected than ever before and providing students with an understanding of the economics associated with this connection will be of the utmost importance.