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The dynamics of automobile expenditures

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  • Adam Copeland

Abstract

This paper presents a dynamic model for light motor vehicles. Consumers solve an optimal stopping problem in deciding if they want a new automobile and when in the model year to purchase it. This dynamic approach allows for determining how the mix of consumers evolves over the model year and for measuring consumers' substitution patterns across products and time. I find that temporal substitution is significant, driving consumers' entry into and exit from the market. Through counterfactuals, I show that because consumers will temporarily substitute to a large degree, failure to account for automakers' dynamic pricing strategies results in an inaccurate picture of the return to using pricing incentives. A further finding is that the large price discounts typically offered at the end of the model year result in price discrimination by inducing price-sensitive consumers to delay purchasing new vehicles until the later months of the model year.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 394.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:394

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Keywords: Consumer behavior ; Automobiles - Prices;

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  1. Adam Copeland & Wendy Dunn & George Hall, 2005. "Prices, production, and inventories over the automotive model year," Finance and Economics Discussion Series 2005-25, Board of Governors of the Federal Reserve System (U.S.).
  2. Magnac & Thesmar, 2002. "Identifying dynamic discrete decision processes," Working Papers 155888, Institut National de la Recherche Agronomique, France.
  3. Pasquale Schiraldi, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics 21780, London School of Economics and Political Science, LSE Library.
  4. Meghan R. Busse & Duncan Simester & Florian Zettelmeyer, 2007. ""The Best Price You'll Ever Get" The 2005 Employee Discount Pricing Promotions in the U.S. Automobile Industry," NBER Working Papers 13140, National Bureau of Economic Research, Inc.
  5. Sobel, Joel, 1991. "Durable Goods Monopoly with Entry of New Consumers," Econometrica, Econometric Society, vol. 59(5), pages 1455-85, September.
  6. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
  7. Hall, George J., 2000. "Non-convex costs and capital utilization: A study of production scheduling at automobile assembly plants," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 681-716, June.
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