Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry
Northwestern University - Department of Managerial Economics and Decision Sciences (MEDS)
University of Pennsylvania - Operations & Information Management Department
December 15, 2014
Despite the abundant theoretical literature on production flexibility, price postponement, and dynamic pricing, limited empirical evidence exists on how production flexibility affects pricing decisions. We use a detailed dataset from the U.S. auto industry spanning 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 co-produced with vehicles that belong to a different segment; and 3) lower in situations with higher local competition. To the best of our knowledge, our paper provides the first empirical evidence on how the deployment of production flexibility affects firms' pricing behavior.
Number of Pages in PDF File: 43
Keywords: flexibility, operations strategy, empirical operations, pricingworking papers series
Date posted: December 13, 2012 ; Last revised: December 18, 2014
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