A system dynamics model of the auto industry: Case study on sustainability of Iran's car market

The economy of oil-exporting Middle Eastern countries is heavily dependent on the oil market. Therefore, any fluctuation of the oil market impacts their economy, often, causing volatile conditions. Iran as one of the important and influential countries in the Middle East has suffered the most from these volatilities. As a member of the Organization for Petroleum Exporting Countries (OPEC), Iran's oil production is roughly four percent of the world's daily production. Although the economy of Iran has been under severe sanctions for years, the intensified sanctions on Iran's oil and energy sector between 2012 and 2016 caused extreme volatility in all its economic sectors due to the large oil-dependency in the entirety of the economy. Manufacturing companies of Iran, such as car producing companies, which are among the largest of their kinds in the Middle East, were no exception. During the sanctions period, the prices jumped rapidly and kept increasing continuously. The price volatility forced companies to start investing on sustainable solutions and rely mostly on domestic producers. Besides, the government started negotiations to relieve from the sanctions on industries which lead to the agreement with P5+1 that is referred as JCPOA. These strategies have recently shown its effectiveness in stabilizing the prices and making sustainable production. In this paper, we first investigate the details of the mechanisms involved in all these transitions and explain the causal loops governing the changes. Then, we propose a system dynamics based model for a car industry including the necessary parameters specific to Iran's car industry. Then we simulate the model to investigate the effects of various parameters on the car prices changes. In a scenario, we inspect the effect of JCPOA on the long-run stabilization of the prices. This paper's results can be used in evaluating the effect of regulatory policies on the sustainability of an auto industry, in particular, Iran's car market.