Prices, Production and Inventories Over the Automotive Model Year

38 Pages Posted: 24 May 2005 Last revised: 22 Jun 2009

See all articles by Adam M. Copeland

Adam M. Copeland

Federal Reserve Bank of New York

Wendy E. Dunn

Board of Governors of the Federal Reserve - Household and Business Spending Section; Johns Hopkins University - Department of Economics

George J. Hall

Brandeis University - Department of Economics and International Business School; Brandeis University - Department of Economics

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Date Written: April 2005

Abstract

This paper studies the within-model-year pricing and production of new automobiles. Using new monthly data on U.S. transaction prices, we document that for the typical new vehicle, prices fall over the model year at a 9.2 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate a market equilibrium model for new automobiles in which inventory and pricing decisions are made simultaneously. On the demand side, we use micro-level data to estimate time-varying aggregate demand curves for each vehicle. On the supply side, we solve a dynamic programming model of an automaker that, while able to produce only one vintage of a product at a time, may accumulate inventories and consequently sell multiple vintages of the same product simultaneously. The profit maximizing pricing and production strategies under a build-to-stock inventory policy imply declining prices and hump-shaped sales and inventories of the magnitudes observed in the data. Further, roughly half of the price decline is driven by inventory control considerations, as opposed to decreasing demand.

Suggested Citation

Copeland, Adam M. and Dunn, Wendy E. and Hall, George J., Prices, Production and Inventories Over the Automotive Model Year (April 2005). NBER Working Paper No. w11257, Available at SSRN: https://ssrn.com/abstract=701183

Adam M. Copeland

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Wendy E. Dunn

Board of Governors of the Federal Reserve - Household and Business Spending Section ( email )

20th and Constitution Ave., NW
Washington, DC 20551
United States

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

George J. Hall (Contact Author)

Brandeis University - Department of Economics and International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-2242 (Phone)

HOME PAGE: http://people.brandeis.edu/~ghall

Brandeis University - Department of Economics ( email )

Waltham, MA 02454-9110
United States

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