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The Response of Prices, Sales, and Output to Temporary Changes in Demand

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  • Adam Copeland
  • George Hall

Abstract

We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks.

Suggested Citation

  • Adam Copeland & George Hall, 2005. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," NBER Working Papers 11870, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11870
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    Citations

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    Cited by:

    1. Adam Copeland & James A. Kahn, 2012. "Exchange rate pass-through, markups, and inventories," Staff Reports 584, Federal Reserve Bank of New York.
    2. McManus, Walter, 2007. "The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom," MPRA Paper 3463, University Library of Munich, Germany.
    3. Florian Zettelmeyer & Fiona Scott Morton & Jorge Silva-Risso, 2006. "Scarcity Rents in Car Retailing: Evidence from Inventory Fluctuations at Dealerships," NBER Working Papers 12177, National Bureau of Economic Research, Inc.
    4. Robert L. Bray & Haim Mendelson, 2015. "Production Smoothing and the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 17(2), pages 208-220, May.
    5. Adam Copeland & James Kahn, 2013. "The Production Impact Of “Cash-For-Clunkers”: Implications For Stabilization Policy," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 288-303, January.
    6. Adam Copeland, 2014. "Intertemporal substitution and new car purchases," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 624-644, September.
    7. Friberg, Richard & Huse, Cristian, 2012. "How to use demand systems to evaluate risky projects, with an application to automobile production," CEPR Discussion Papers 9266, C.E.P.R. Discussion Papers.
    8. Šustek, Roman, 2011. "Plant-level nonconvex output adjustment and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 400-414.
    9. James Kahn & Adam Copeland, 2012. "Durable Goods Production and Inventory Dynamics: An Application to the Automobile Industry," 2012 Meeting Papers 270, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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