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Prices, Production and Inventories over the Automotive Model Year

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  • Copeland, Adam

    (Board of Governors of the Federal Reserve System, Board of Governors of the Federal Reserve System)

  • Hall, George J.

    (Yale U)

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 typically 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.

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Bibliographic Info

Paper provided by Yale University, Department of Economics in its series Working Papers with number 2.

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Date of creation: Mar 2005
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Handle: RePEc:ecl:yaleco:2

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  1. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-92, September.
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Cited by:
  1. Adam Copeland, 2008. "The Dynamics of Automobile Expenditures," 2008 Meeting Papers 852, Society for Economic Dynamics.
  2. Guillermo Caruana & Liran Einav, 2006. "Production Targets," NBER Working Papers 11958, National Bureau of Economic Research, Inc.
  3. Chen, Jiawei & Esteban, Susanna & Shum, Matthew, 2010. "Do sales tax credits stimulate the automobile market?," International Journal of Industrial Organization, Elsevier, vol. 28(4), pages 397-402, July.
  4. 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.
  5. Adam Copeland & George Hall, 2006. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," 2006 Meeting Papers 39, Society for Economic Dynamics.
  6. Carol Corrado & Wendy Dunn & Maria Otoo, 2006. "Incentives and prices for motor vehicles: what has been happening in recent years?," Finance and Economics Discussion Series 2006-09, Board of Governors of the Federal Reserve System (U.S.).
  7. Ana Aizcorbe & Benjamin Bridgman & Jeremy Nalewaik, 2009. "Heterogeneous car buyers: a stylized fact," Finance and Economics Discussion Series 2009-12, Board of Governors of the Federal Reserve System (U.S.).
  8. Ashley Langer & Nathan H. Miller, 2008. "Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel Economy," EAG Discussions Papers 200811, Department of Justice, Antitrust Division.

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