Working Paper: NBER ID: w11958
Authors: Guillermo Caruana; Liran Einav
Abstract: We present a dynamic quantity setting game, where players may continuously adjust their quantity targets, but incur convex adjustment costs when they do so. These costs allow players to use quantity targets as a partial commitment device. We show that the equilibrium path of such a game is hump-shaped and that the final equilibrium outcome is more competitive than its static analog. We then test the theory using monthly production targets of the Big Three U.S. auto manufacturers during 1965-1995 and show that the hump-shaped dynamic pattern is present in the data. Initially, production targets steadily increase until they peak about 2-3 months before production. Then, they gradually decline to eventual production levels. This qualitative pattern is fairly robust across a range of similar exercises. We conclude that strategic considerations play a role in the planning phase in the auto industry, and that static models may therefore under-estimate the industry's competitiveness.
Keywords: No keywords provided
JEL Codes: C72; C73; D43; L13; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| production targets (E23) | competitive behavior of firms (L13) |
| strategic considerations during planning phase (L21) | final production outcomes (L23) |
| production target adjustments (E23) | competitive behavior of firms (L13) |
| initially set production targets (D20) | higher outputs (E23) |
| hump-shaped pattern of production targets (E23) | final equilibrium production levels (E23) |
| adjustment costs (J30) | strategic behavior of firms (L21) |
| strategic interactions and commitment dynamics (C73) | production decisions (L23) |