Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry

Abstract:     
Despite the abundant theoretical literature on production flexibility, price postponement, and dynamic pricing, there exists limited empirical evidence on how production flexibility affects pricing decisions. Using a detailed dataset from the U.S. auto industry, we examine the relationship between production flexibility and responsive pricing. Our analysis shows that deploying production flexibility is associated with reductions in observed discounts, resulting from an increased ability to match supply and demand. The reduction in discounts is not explained by changes in costs or list prices after the adoption of flexibility. Under the observed market conditions between 2002 and 2009, flexibility accounts for average savings in discounts of $200 to $700 per vehicle sold. This is equivalent to savings of about 10% of the total average discounts provided in the industry. Furthermore, we demonstrate that plant utilization increases after the deployment of flexibility, providing an additional benefit from flexibility adoption. To the best of our knowledge, our paper provides the first piece of empirical evidence of how the deployment of production flexibility affects firms’ pricing behavior.

Number of Pages in PDF File: 29

working papers series