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Production Targets

Author

Listed:
  • Guillermo Caruana

    (CEMFI)

  • Liran Einav

    (Stanford University)

Abstract

We present a dynamic quantity setting game, where players may continuously adjust their quantity targets, but incur convex adjustment costs when they do so. These costs allow players to use quantity targets as a partial commitment device. We show that the equilibrium path of such a game is hump-shaped and that the final equilibrium outcome is more competitive than its static analog. We then test the theory using monthly production targets of the Big Three U.S. auto manufacturers during 1965-1995 and show that the hump-shaped dynamic pattern is present in the data. Initially, production targets steadily increase until they peak about 2-3 months before production. Then, they gradually decline to eventual production levels. This qualitative pattern is fairly robust across a range of similar exercises. We conclude that strategic considerations play a role in the planning phase in the auto industry, and that static models may therefore under-estimate the industry’s competitiveness.

Suggested Citation

  • Guillermo Caruana & Liran Einav, 2005. "Production Targets," Discussion Papers 04-032, Stanford Institute for Economic Policy Research.
    • Handle: RePEc:sip:dpaper:04-032
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    Cited by:

    1. Ryota Iijima & Akitada Kasahara, 2016. "Gradual Adjustment and Equilibrium Uniqueness under Noisy Monitoring," ISER Discussion Paper 0965, Institute of Social and Economic Research, Osaka University.
    2. José Cerón & Javier Suarez, 2006. "Hot and Cold Housing Markets: International Evidence," Working Papers wp2006_0603, CEMFI.
    3. Liran Einav & S. Ravid, 2009. "Stock market response to changes in movies’ opening dates," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 33(4), pages 311-319, November.
    4. Javier Díaz-Giménez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: A Boon for the Income Poor," Working Papers wp2006_0611, CEMFI.
    5. Roy, Nilanjan, 2017. "Action revision, information and collusion in an experimental duopoly market," MPRA Paper 77033, University Library of Munich, Germany.
    6. Kao, Tina & Menezes, Flavio & Quiggin, John, 2012. "Meeting the Competition: Commitment and Competitive Behavior," Risk and Sustainable Management Group Working Papers 151205, University of Queensland, School of Economics.

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    More about this item

    Keywords

    differential games; adjustment costs; Cournot; quantity competition; dynamic oligopoly games;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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