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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. Goldberg, Pinelopi Koujianou, 1996. "Dealer Price Discrimination in New Car Purchases: Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 622-54, June.
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Cited by:
  1. George Alessandria & Joseph Kaboski & Virgiliu Midrigan, 2008. "Inventories, lumpy trade, and large devaluations," Working Paper Series WP-08-07, Federal Reserve Bank of Chicago.
  2. Adam Copeland & George Hall, 2005. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," Cowles Foundation Discussion Papers 1543, Cowles Foundation for Research in Economics, Yale University.
  3. 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.).
  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. Guillermo Caruana & Liran Einav, 2006. "Production Targets," 2006 Meeting Papers 16, Society for Economic Dynamics.
  6. Adam Copeland, 2008. "The Dynamics of Automobile Expenditures," 2008 Meeting Papers 852, Society for Economic Dynamics.
  7. 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.
  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.
  9. 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.).

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