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Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry

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  • Antonio Moreno

    (Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • Christian Terwiesch

    (Operations and Information Management Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

We use a detailed data set from the U.S. auto industry spanning from 2002 to 2009 and a variety of econometric methods to characterize the relationship between the availability of production mix flexibility and firms’ use of responsive pricing. We find that production mix flexibility is associated with reductions in observed manufacturer discounts, resulting from the increased ability to match supply and demand. Under the observed market conditions, mix flexibility accounts for substantial average savings by reducing price discounting by approximately 10% of the average industry discount. We test three supplementary hypotheses and find that the reduction in discounts for vehicles manufactured at flexible plants is (1) higher for higher demand uncertainty, (2) higher for vehicles coproduced with vehicles that belong to a different segment, and (3) lower in situations with higher local competition.

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  • Antonio Moreno & Christian Terwiesch, 2015. "Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 428-444, October.
    • Handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:428-444
    DOI: 10.1287/msom.2015.0534
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    References listed on IDEAS

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