Production Targets

42 Pages Posted: 13 Apr 2006 Last revised: 5 Sep 2010

See all articles by Guillermo Caruana

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI)

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2006

Abstract

We present a dynamic quantity setting game, where players may continuously adjust their quantity targets, but incur convex adjustment costs when they do so. These costs allow players to use quantity targets as a partial commitment device. We show that the equilibrium path of such a game is hump-shaped and that the final equilibrium outcome is more competitive than its static analog. We then test the theory using monthly production targets of the Big Three U.S. auto manufacturers during 1965-1995 and show that the hump-shaped dynamic pattern is present in the data. Initially, production targets steadily increase until they peak about 2-3 months before production. Then, they gradually decline to eventual production levels. This qualitative pattern is fairly robust across a range of similar exercises. We conclude that strategic considerations play a role in the planning phase in the auto industry, and that static models may therefore under-estimate the industry's competitiveness.

Suggested Citation

Caruana, Guillermo and Einav, Liran, Production Targets (January 2006). NBER Working Paper No. w11958. Available at SSRN: https://ssrn.com/abstract=877463

Guillermo Caruana

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
34 91 429 0551 (Phone)
34 91 429 1056 (Fax)

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-723-3704 (Phone)
928-223-4973 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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