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

41 Pages Posted: 7 Dec 2005

See all articles by Adam M. Copeland

Adam M. Copeland

Federal Reserve Bank of New York

George J. Hall

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

Multiple version iconThere are 2 versions of this paper

Date Written: December 2005

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.

Keywords: automobile pricing, inventories, revenue management, indirect inference

JEL Classification: D21, D42, E22, E23, L11, L62

Suggested Citation

Copeland, Adam M. and Hall, George J., The Response of Prices, Sales, and Output to Temporary Changes in Demand (December 2005). Cowles Foundation Discussion Paper No. 1543, Available at SSRN: https://ssrn.com/abstract=869024

Adam M. Copeland

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
116
Abstract Views
1,501
rank
229,666
PlumX Metrics