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The response of prices, sales, and output to temporary changes in demand

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  • Adam Copeland
  • George Hall

Abstract

We determine empirically how automakers accommodate shocks to demand. Using data on production, sales, and transaction prices, we estimate a dynamic profit maximization model of the firm. We demonstrate that when an automaker is hit with a vehicle-specific demand shock, sales respond immediately and prices respond very modestly. Further, when accounting for non‐convexities in the cost function, production responds with a delay. Over time, shocks are absorbed almost entirely through adjustments in sales and production rather than prices. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the 11 September 2001 terrorist attacks. Copyright (C) 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.1120
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 26 (2011)
Issue (Month): 2 (March)
Pages: 232-269

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Handle: RePEc:wly:japmet:v:26:y:2011:i:2:p:232-269

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Cited by:
  1. Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2006. "Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships," NBER Working Papers 12177, National Bureau of Economic Research, Inc.
  2. Adam Copeland & James Kahn, 2011. "The production impact of "cash-for-clunkers": implications for stabilization policy," Staff Reports 503, Federal Reserve Bank of New York.
  3. Adam Copeland & James A. Kahn, 2012. "Exchange rate pass-through, markups, and inventories," Staff Reports 584, Federal Reserve Bank of New York.
  4. McManus, Walter, 2007. "The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom," MPRA Paper 3463, University Library of Munich, Germany.
  5. James Kahn & Adam Copeland, 2012. "Durable Goods Production and Inventory Dynamics: An Application to the Automobile Industry," 2012 Meeting Papers 270, Society for Economic Dynamics.

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