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Prices, production, and inventories over the automotive model year

  • Adam Copeland
  • Wendy Dunn
  • George Hall

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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2005-25.

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Date of creation: 2005
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Handle: RePEc:fip:fedgfe:2005-25
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  1. 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.).
  2. James Levinsohn & Steven Berry & Ariel Pakes, 1999. "Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy," American Economic Review, American Economic Association, vol. 89(3), pages 400-430, June.
  3. Wedad Elmaghraby & P{\i}nar Keskinocak, 2003. "Dynamic Pricing in the Presence of Inventory Considerations: Research Overview, Current Practices, and Future Directions," Management Science, INFORMS, vol. 49(10), pages 1287-1309, October.
  4. Valerie A. Ramey & Daniel J. Vine, 2005. "Tracking the source of the decline in GDP volatility: an analysis of the automobile industry," Finance and Economics Discussion Series 2005-14, Board of Governors of the Federal Reserve System (U.S.).
  5. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June.
  6. 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.
  7. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 355-71, August.
  8. Florian Zettelmeyer & Fiona M. Scott Morton & Jorge Silva-Risso, 2001. "Cowboys or Cowards: Why are Internet Car Prices Lower?," Yale School of Management Working Papers ysm241, Yale School of Management.
  9. John Rust & Hui Man Chan & George Hall, 2004. "Price Discrimination in the Steel Market," Econometric Society 2004 North American Summer Meetings 245, Econometric Society.
  10. Pashigian, B Peter, 1988. "Demand Uncertainty and Sales: A Study of Fashion and Markdown Pricin g," American Economic Review, American Economic Association, vol. 78(5), pages 936-53, December.
  11. Timothy F. Bresnahan & Valerie A. Ramey, 1992. "Output Fluctuations at the Plant Level," NBER Working Papers 4105, National Bureau of Economic Research, Inc.
  12. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
  13. Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2001. "Cowboys or Cowards: Why are Internet Car Prices Lower?," NBER Working Papers 8667, National Bureau of Economic Research, Inc.
  14. 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.
  15. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
  16. Timothy F. Bresnahan & Peter C. Reiss, 1985. "Dealer and Manufacturer Margins," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 253-268, Summer.
  17. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  18. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 513-548, December.
  19. Goldberg, Pinelopi Koujianou, 1995. "Product Differentiation and Oligopoly in International Markets: The Case of the U.S. Automobile Industry," Econometrica, Econometric Society, vol. 63(4), pages 891-951, July.
  20. Pashigian, B Peter & Bowen, Brian & Gould, Eric, 1995. "Fashion, Styling, and the Within-Season Decline in Automobile Prices," Journal of Law and Economics, University of Chicago Press, vol. 38(2), pages 281-309, October.
  21. T. M. Whitin, 1955. "Inventory Control and Price Theory," Management Science, INFORMS, vol. 2(1), pages 61-68, October.
  22. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  23. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
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