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Production targets

  • Guillermo Caruana
  • Liran Einav

We analyze a dynamic model of quantity competition, where firms continuously adjust their quantity targets, but incur convex adjustment costs when they do so. Quantity targets serve as a partial commitment device and, in equilibrium, follow a hump-shaped pattern. The final equilibrium is more competitive than in the static analog. We then use data on monthly production targets of the Big Three U.S. auto manufacturers and show a similar empirical hump-shaped dynamic pattern. Taken together, this suggests that strategic considerations may play a role in setting auto production schedules, and that static models may misestimate the industry's competitiveness. Copyright (c) 2008, RAND.

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Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 4 ()
Pages: 990-1017

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Handle: RePEc:bla:randje:v:39:y:2008:i:4:p:990-1017
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  1. Stephen Ryan, 2005. "The Costs of Environmental Regulation in a Concentrated Industry," Working Papers 0510, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  2. Guillermo Caruana & Liran Einav, 2008. "A Theory of Endogenous Commitment," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 99-116.
  3. Adam Copeland & Wendy Dunn & George Hall, 2005. "Prices, Production and Inventories over the Automotive Model Year," NBER Working Papers 11257, National Bureau of Economic Research, Inc.
  4. Reynolds, Stanley S., 1991. "Dynamic oligopoly with capacity adjustment costs," Journal of Economic Dynamics and Control, Elsevier, vol. 15(3), pages 491-514, July.
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  7. Cyert, Richard M & DeGroot, M H, 1970. "Multiperiod Decision Models with Alternating Choice as a Solution to the Duopoly Problem," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 410-29, August.
  8. Kahn, James A, 1992. "Why Is Production More Volatile Than Sales? Theory and Evidence on the Stockout-Avoidance Motive for Inventory-Holding," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 481-510, May.
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  10. Romano, Richard & Yildirim, Huseyin, 2005. "On the endogeneity of Cournot-Nash and Stackelberg equilibria: games of accumulation," Journal of Economic Theory, Elsevier, vol. 120(1), pages 73-107, January.
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  14. Ernst R. Berndt & Ann F. Friedlaender & Judy Shaw-Er Wang Chiang, 1990. "Interdependent Pricing and Markup Behavior: An Empirical Analysis of GM, Ford and Chrysler," NBER Working Papers 3396, National Bureau of Economic Research, Inc.
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  16. Maura P. Doyle & Christopher M. Snyder, 1997. "Information sharing and competition in the motor vehicle industry," Finance and Economics Discussion Series 1997-4, Board of Governors of the Federal Reserve System (U.S.).
  17. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 581-611, 07.
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  20. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 581-611.
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