The Economics of Formula 1

Abstract

At the end of the 2008 season, Honda withdrew from F1 and planned to turn the attention of its 400 engineers to developing more environmentally friendly cars. In the wake of Honda’s withdrawal, Toyota, and Sauber BMW ar e scheduled to withdraw at the end of 2009 as well. This begs the question of why these mainstream automobile manufacturers are backing out of F1. The F1 market can be viewed as an oligopolistic market which comprises of a small number of strategically interacting players. The decisions made by one player in such a market affect the decisions of the others and vice versa. One of the characteristic features in an oligopolistic market is that firms can create a cartel by adopting a strategy of explicit or even tacit collusion, facilitated by their strategic interaction. The players involved in our case can be identified as the teams which compete in F1 such as Ferrari, McLaren- Mercedes, and Sauber BMW. The Federation Internationale de l’ Auto mobile is commonly know n as the FIA is the overseeing regulatory body in F1. The FIA is responsible for sanctioning of funds and licensing F1 teams.