The dynamics of automobile expenditures
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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References listed on IDEAS
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- Hall, George J., 2000.
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STICERD - Economics of Industry Papers
49, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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- 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.
- repec:oup:restud:v:66:y:1999:i:2:p:275-308 is not listed on IDEAS
- Copeland, Adam & Hall, George J., 2005.
"Prices, Production and Inventories over the Automotive Model Year,"
2, Yale University, Department of Economics.
- George Hall & Adam Copeland & Wendy Dunn, 2005. "Prices, Production, and Inventories Over the Automotive Model Year," 2005 Meeting Papers 346, Society for Economic Dynamics.
- 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.
- Adam Copeland & Wendy E. Dunn & George J. 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.).
- 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.
- Thierry Magnac & David Thesmar, 2002. "Identifying Dynamic Discrete Decision Processes," Econometrica, Econometric Society, vol. 70(2), pages 801-816, March.
- Sobel, Joel, 1991. "Durable Goods Monopoly with Entry of New Consumers," Econometrica, Econometric Society, vol. 59(5), pages 1455-85, September.
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