Working Paper: NBER ID: w11257
Authors: Adam Copeland; Wendy Dunn; George Hall
Abstract: This paper studies the within-model-year pricing and production of new automobiles. Using new monthly data on U.S. transaction prices, we document that for the typical new vehicle, prices fall over the model year at a 9.2 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate a market equilibrium model for new automobiles in which inventory and pricing decisions are made simultaneously. On the demand side, we use micro-level data to estimate time-varying aggregate demand curves for each vehicle. On the supply side, we solve a dynamic programming model of an automaker that, while able to produce only one vintage of a product at a time, may accumulate inventories and consequently sell multiple vintages of the same product simultaneously. The profit maximizing pricing and production strategies under a build-to-stock inventory policy imply declining prices and hump-shaped sales and inventories of the magnitudes observed in the data. Further, roughly half of the price decline is driven by inventory control considerations, as opposed to decreasing demand.
Keywords: No keywords provided
JEL Codes: D21; D42; E22; L11; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inventory levels (D25) | Price declines (E30) |
| Inventory control strategies (C69) | Price declines (E30) |
| Inventory management (M11) | Pricing behavior (D40) |
| Inventory levels (D25) | Pricing policies (D49) |
| High inventories (G31) | Lower retail prices (D49) |