IDEAS home Printed from https://ideas.repec.org/a/inm/ormsom/v17y2015i4p428-444.html
   My bibliography  Save this article

Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry

Author

Listed:
  • Antonio Moreno

    (Managerial Economics and Decision Sciences, Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

  • Christian Terwiesch

    (Operations and Information Management Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

We use a detailed data set from the U.S. auto industry spanning from 2002 to 2009 and a variety of econometric methods to characterize the relationship between the availability of production mix flexibility and firms’ use of responsive pricing. We find that production mix flexibility is associated with reductions in observed manufacturer discounts, resulting from the increased ability to match supply and demand. Under the observed market conditions, mix flexibility accounts for substantial average savings by reducing price discounting by approximately 10% of the average industry discount. We test three supplementary hypotheses and find that the reduction in discounts for vehicles manufactured at flexible plants is (1) higher for higher demand uncertainty, (2) higher for vehicles coproduced with vehicles that belong to a different segment, and (3) lower in situations with higher local competition.

Suggested Citation

  • Antonio Moreno & Christian Terwiesch, 2015. "Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 428-444, October.
    • Handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:428-444
    DOI: 10.1287/msom.2015.0534
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/msom.2015.0534
    Download Restriction: no
    File URL: https://libkey.io/10.1287/msom.2015.0534?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Oben Ceryan & Ozge Sahin & Izak Duenyas, 2013. "Dynamic Pricing of Substitutable Products in the Presence of Capacity Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 15(1), pages 86-101, April.
    2. Manu Goyal & Serguei Netessine, 2007. "Strategic Technology Choice and Capacity Investment Under Demand Uncertainty," Management Science, INFORMS, vol. 53(2), pages 192-207, February.
    3. Meghan Busse & Jorge Silva-Risso & Florian Zettelmeyer, 2006. "$1,000 Cash Back: The Pass-Through of Auto Manufacturer Promotions," American Economic Review, American Economic Association, vol. 96(4), pages 1253-1270, September.
    4. Keisuke Hirano & Guido W. Imbens & Geert Ridder, 2003. "Efficient Estimation of Average Treatment Effects Using the Estimated Propensity Score," Econometrica, Econometric Society, vol. 71(4), pages 1161-1189, July.
    5. Jiri Chod & Nils Rudi, 2005. "Resource Flexibility with Responsive Pricing," Operations Research, INFORMS, vol. 53(3), pages 532-548, June.
    6. Anandasivam Gopal & Manu Goyal & Serguei Netessine & Matthew Reindorp, 2013. "The Impact of New Product Introduction on Plant Productivity in the North American Automotive Industry," Management Science, INFORMS, vol. 59(10), pages 2217-2236, October.
    7. William C. Jordan & Stephen C. Graves, 1995. "Principles on the Benefits of Manufacturing Process Flexibility," Management Science, INFORMS, vol. 41(4), pages 577-594, April.
    8. Alberto Abadie & Guido W. Imbens, 2002. "Simple and Bias-Corrected Matching Estimators for Average Treatment Effects," NBER Technical Working Papers 0283, National Bureau of Economic Research, Inc.
    9. Gérard P. Cachon & Marcelo Olivares, 2010. "Drivers of Finished-Goods Inventory in the U.S. Automobile Industry," Management Science, INFORMS, vol. 56(1), pages 202-216, January.
    10. Parker, Rodney P. & Wirth, Andrew, 1999. "Manufacturing flexibility: Measures and relationships," European Journal of Operational Research, Elsevier, vol. 118(3), pages 429-449, November.
    11. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-959, July.
    12. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    13. Rajeev H. Dehejia & Sadek Wahba, 2002. "Propensity Score-Matching Methods For Nonexperimental Causal Studies," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 151-161, February.
    14. Marcelo Olivares & Gérard P. Cachon, 2009. "Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets," Management Science, INFORMS, vol. 55(9), pages 1586-1604, September.
    15. Donald B. Rubin, 2005. "Causal Inference Using Potential Outcomes: Design, Modeling, Decisions," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 322-331, March.
    16. Jan A. Van Mieghem & Maqbool Dada, 1999. "Price Versus Production Postponement: Capacity and Competition," Management Science, INFORMS, vol. 45(12), pages 1639-1649, December.
    17. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    18. Robert S. Huckman & Darren E. Zinner, 2008. "Does focus improve operational performance? Lessons from the management of clinical trials," Strategic Management Journal, Wiley Blackwell, vol. 29(2), pages 173-193, February.
    19. Charles H. Fine & Robert M. Freund, 1990. "Optimal Investment in Product-Flexible Manufacturing Capacity," Management Science, INFORMS, vol. 36(4), pages 449-466, April.
    20. Diwas Singh KC & Christian Terwiesch, 2011. "The Effects of Focus on Performance: Evidence from California Hospitals," Management Science, INFORMS, vol. 57(11), pages 1897-1912, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Antonio Moreno & Christian Terwiesch, 2017. "The Effects of Product Line Breadth: Evidence from the Automotive Industry," Marketing Science, INFORMS, vol. 36(2), pages 254-271, March.
    2. Hariharan, Sharethram & Liu, Tieming & Shen, Zuo-Jun Max, 2020. "Role of resource flexibility and responsive pricing in mitigating the uncertainties in production systems," European Journal of Operational Research, Elsevier, vol. 284(2), pages 498-513.
    3. Manuel Chica & Joaquín Bautista & Jesica de Armas, 2019. "Benefits of robust multiobjective optimization for flexible automotive assembly line balancing," Flexible Services and Manufacturing Journal, Springer, vol. 31(1), pages 75-103, March.
    4. He, Wen, 2019. "Impact of capacity flexibility on the use of booking limits," European Journal of Operational Research, Elsevier, vol. 274(1), pages 199-213.
    5. Marshall Fisher & Marcelo Olivares & Bradley R. Staats, 2020. "Why Empirical Research Is Good for Operations Management, and What Is Good Empirical Operations Management?," Manufacturing & Service Operations Management, INFORMS, vol. 22(1), pages 170-178, January.
    6. Huiming Liu & Su Wu & Chongwen Zhong & Ying Liu, 2020. "The Sustainable Effect of Operational Performance on Financial Benefits: Evidence from Chinese Quality Awards Winners," Sustainability, MDPI, vol. 12(5), pages 1-23, March.
    7. Christian Terwiesch, 2019. "OM Forum—Empirical Research in Operations Management: From Field Studies to Analyzing Digital Exhaust," Manufacturing & Service Operations Management, INFORMS, vol. 21(4), pages 713-722, October.
    8. Soledad Giardili & Kamalini Ramdas & Jonathan W. Williams, 2023. "Leadership and Productivity: A Study of U.S. Automobile Assembly Plants," Management Science, INFORMS, vol. 69(3), pages 1500-1517, March.
    9. Sun, Wenqiang & Wang, Qiang & Zhou, Yue & Wu, Jianzhong, 2020. "Material and energy flows of the iron and steel industry: Status quo, challenges and perspectives," Applied Energy, Elsevier, vol. 268(C).
    10. Gérard P. Cachon & Santiago Gallino & Marcelo Olivares, 2019. "Does Adding Inventory Increase Sales? Evidence of a Scarcity Effect in U.S. Automobile Dealerships," Management Science, INFORMS, vol. 65(4), pages 1469-1485, April.
    11. Shixin Wang & Xuan Wang & Jiawei Zhang, 2021. "A Review of Flexible Processes and Operations," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1804-1824, June.
    12. Rafael Becerril-Arreola, 2020. "Estimating Demand with Substitution and Intraline Price Spillovers," Manufacturing & Service Operations Management, INFORMS, vol. 22(3), pages 598-614, May.
    13. Li, Li & Jiang, Li, 2022. "Saving costs and improving selling through competitor cooperation in sourcing," European Journal of Operational Research, Elsevier, vol. 302(3), pages 970-982.
    14. Gong, Qiguo & Chen, Guohui & Zhang, Wen & Wang, Hui, 2022. "The role of humans in flexible smart factories," International Journal of Production Economics, Elsevier, vol. 254(C).
    15. Christian Terwiesch & Marcelo Olivares & Bradley R. Staats & Vishal Gaur, 2020. "OM Forum—A Review of Empirical Operations Management over the Last Two Decades," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 656-668, July.
    16. LI, Li, 2019. "Cooperative purchasing and preactive inventory sharing – Channel balancing and performance improvement," European Journal of Operational Research, Elsevier, vol. 278(3), pages 738-751.
    17. Ken Moon & Patrick Bergemann & Daniel Brown & Andrew Chen & James Chu & Ellen A. Eisen & Gregory M. Fischer & Prashant Loyalka & Sungmin Rho & Joshua Cohen, 2023. "Manufacturing Productivity with Worker Turnover," Management Science, INFORMS, vol. 69(4), pages 1995-2015, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rachna Shah & George P. Ball & Serguei Netessine, 2017. "Plant Operations and Product Recalls in the Automotive Industry: An Empirical Investigation," Management Science, INFORMS, vol. 63(8), pages 2439-2459, August.
    2. Onur Boyabatlı & Tiecheng Leng & L. Beril Toktay, 2016. "The Impact of Budget Constraints on Flexible vs. Dedicated Technology Choice," Management Science, INFORMS, vol. 62(1), pages 225-244, January.
    3. Manu Goyal & Serguei Netessine, 2011. "Volume Flexibility, Product Flexibility, or Both: The Role of Demand Correlation and Product Substitution," Manufacturing & Service Operations Management, INFORMS, vol. 13(2), pages 180-193, March.
    4. Yanmin Jiang & Rui-Na Fan, 2022. "Capacity Investment and Process Efficiency at Flexible Firms," Mathematics, MDPI, vol. 10(10), pages 1-17, May.
    5. Hariharan, Sharethram & Liu, Tieming & Shen, Zuo-Jun Max, 2020. "Role of resource flexibility and responsive pricing in mitigating the uncertainties in production systems," European Journal of Operational Research, Elsevier, vol. 284(2), pages 498-513.
    6. Anandasivam Gopal & Manu Goyal & Serguei Netessine & Matthew Reindorp, 2013. "The Impact of New Product Introduction on Plant Productivity in the North American Automotive Industry," Management Science, INFORMS, vol. 59(10), pages 2217-2236, October.
    7. Boonman, H.J. & Hagspiel, V. & Kort, P.M., 2015. "Dedicated vs product flexible production technology: Strategic capacity investment choice," European Journal of Operational Research, Elsevier, vol. 244(1), pages 141-152.
    8. Chad D. Meyerhoefer & Muzhe Yang, 2011. "The Relationship between Food Assistance and Health: A Review of the Literature and Empirical Strategies for Identifying Program Effects," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(3), pages 304-344.
    9. Yang, Liu & Ng, C.T., 2014. "Flexible capacity strategy with multiple market periods under demand uncertainty and investment constraint," European Journal of Operational Research, Elsevier, vol. 236(2), pages 511-521.
    10. Cuong NGUYEN, 2016. "An Introduction to Alternative Methods in Program Impact Evaluation," Journal of Economic and Social Thought, KSP Journals, vol. 3(3), pages 349-375, September.
    11. Brian Tomlin & Yimin Wang, 2008. "Pricing and Operational Recourse in Coproduction Systems," Management Science, INFORMS, vol. 54(3), pages 522-537, March.
    12. Christian Terwiesch & Marcelo Olivares & Bradley R. Staats & Vishal Gaur, 2020. "OM Forum—A Review of Empirical Operations Management over the Last Two Decades," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 656-668, July.
    13. Liu Yang & Chi To Ng & Yaodong Ni, 2017. "Flexible capacity strategy in an asymmetric oligopoly market with competition and demand uncertainty," Naval Research Logistics (NRL), John Wiley & Sons, vol. 64(2), pages 117-138, March.
    14. Achal Bassamboo & Ramandeep S. Randhawa & Jan A. Van Mieghem, 2010. "Optimal Flexibility Configurations in Newsvendor Networks: Going Beyond Chaining and Pairing," Management Science, INFORMS, vol. 56(8), pages 1285-1303, August.
    15. Sunil Mithas & M. S. Krishnan, 2009. "From Association to Causation via a Potential Outcomes Approach," Information Systems Research, INFORMS, vol. 20(2), pages 295-313, June.
    16. Dipankar Bose & A. K. Chatterjee & Samir Barman, 2016. "Towards dominant flexibility configurations in strategic capacity planning under demand uncertainty," OPSEARCH, Springer;Operational Research Society of India, vol. 53(3), pages 604-619, September.
    17. Bish, Ebru K. & Suwandechochai, Rawee, 2010. "Optimal capacity for substitutable products under operational postponement," European Journal of Operational Research, Elsevier, vol. 207(2), pages 775-783, December.
    18. Yang, Liu & Wang, Yonggui & Ma, Jun & Ng, Chi To & Cheng, T.C.E., 2014. "Technology investment under flexible capacity strategy with demand uncertainty," International Journal of Production Economics, Elsevier, vol. 154(C), pages 190-197.
    19. Teck-Hua Ho & Noah Lim & Sadat Reza & Xiaoyu Xia, 2017. "OM Forum—Causal Inference Models in Operations Management," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 509-525, October.
    20. Jiri Chod & David Pyke & Nils Rudi, 2010. "The Value of Flexibility in Make-to-Order Systems: The Effect of Demand Correlation," Operations Research, INFORMS, vol. 58(4-part-1), pages 834-848, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormsom:v:17:y:2015:i:4:p:428-444. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.