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

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  • Adam Copeland
  • George Hall

    (Department of Economics Brandeis University)

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, 2006. "The Response of Prices, Sales, and Output to Temporary Changes in Demand," 2006 Meeting Papers 39, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:39
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    References listed on IDEAS

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    Cited by:

    1. Kristiaan Kerstens & Ignace Van de Woestyne, 2021. "Cost functions are nonconvex in the outputs when the technology is nonconvex: convexification is not harmless," Annals of Operations Research, Springer, vol. 305(1), pages 81-106, October.
    2. Caio Machado, 2024. "Coordinating in Financial Crises," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 54, October.
    3. Antoniades, Alexis & Clerides, Sofronis & Xu, Mingzhi, 2023. "Multi-product firm price and variety response to firm-specific cost shocks," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    4. Priscila Silva & Mariana Hidalgo & Mindy Hotchkiss & Lasitha Dharmasena & Igor Linkov & Lance Fiondella, 2024. "Predictive Resilience Modeling Using Statistical Regression Methods," Mathematics, MDPI, vol. 12(15), pages 1-30, July.
    5. Adam Copeland & James A. Kahn, 2012. "Exchange rate pass-through, markups, and inventories," Staff Reports 584, Federal Reserve Bank of New York.
    6. 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.
    7. 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.
    8. Ayelet Israeli & Fiona Scott-Morton & Jorge Silva-Risso & Florian Zettelmeyer, 2022. "How Market Power Affects Dynamic Pricing: Evidence from Inventory Fluctuations at Car Dealerships," Management Science, INFORMS, vol. 68(2), pages 895-916, February.
    9. Latino, Carmelo & Pelizzon, Loriana & Riedel, Max, 2023. "How to green the European Auto ABS market? A literature survey," SAFE Working Paper Series 391, Leibniz Institute for Financial Research SAFE.
    10. Robert L. Bray & Haim Mendelson, 2015. "Production Smoothing and the Bullwhip Effect," Manufacturing & Service Operations Management, INFORMS, vol. 17(2), pages 208-220, May.
    11. Adam Copeland & George Hall & Louis J. Maccini, 2019. "Interest Rates and the Market for New Light Vehicles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1137-1168, August.
    12. 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.
    13. Nils Gottfries & Glenn Mickelsson & Karolina Stadin, 2021. "Deep Dynamics," CESifo Working Paper Series 8873, CESifo.
    14. Adam Copeland, 2014. "Intertemporal substitution and new car purchases," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 624-644, September.
    15. Chuang, Chia-Hung & Zhao, Yabing, 2019. "Demand stimulation in finished-goods inventory management: Empirical evidence from General Motors dealerships," International Journal of Production Economics, Elsevier, vol. 208(C), pages 208-220.
    16. 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.
    17. Robert G. Hammond, 2013. "Sudden Unintended Used‐Price Deceleration? The 2009–2010 Toyota Recalls," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(1), pages 78-100, March.
    18. Šustek, Roman, 2011. "Plant-level nonconvex output adjustment and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 400-414.
    19. 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.

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    More about this item

    Keywords

    automobile pricing; inventories; revenue management; indirect inference;
    All these keywords.

    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

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