Pricing and Production Flexibility: An Empirical Analysis of the U.S. Automotive Industry
40 Pages Posted: 13 Dec 2012 Last revised: 7 Mar 2015
Date Written: March 1, 2015
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.
Keywords: flexibility, operations strategy, empirical operations, pricing, automotive industry
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