Inventories and the automobile market

Abstract

This paper studies the within-model-year pricing, production, and inventory management of new automobiles. Using new monthly data on U.S. transaction prices, we document that, for the typical vehicle, prices fall over the model year at a 9.0 percent annual rate. Concurrently, both sales and inventories are hump shaped. To explain these time series, we formulate an industry model for new automobiles in which inventory and pricing decisions are made simultaneously. The model predicts that automakers' build-to-stock inventory management policy substantially influences the time-series of prices and sales, accounting for four-tenths of the price decline observed over the model year.Keywords: dynamic pricing, revenue management, discrete-choice demand estimation, build-to-stock inventory policy JEL classification: D21, D42, E22, L11, L62 * We thank Ana Aizcorbe, Steve Berry, Andrew Cohen, Gautam Gowrisankaran, Amil Petrin, John Rust, John Stevens, and participants at numerous conferences and seminars for their helpful comments. We also received valuable comments from the editor and two referees. Finally we thank Bob Schnorbuss for helping us obtain and interpret the data from J.D. Power and Associates. George Hall gratefully acknowledges financial support from the Alfred P. Sloan Foundation. The views expressed in the paper are those of the authors and not necessarily reflective of views at the Board of Governors, the Federal Two common features of durable goods markets are high levels of inventories relative to sales and declining prices over the product cycle. In this paper, we jointly consider the optimal pricing and inventory management policies for automakers, the quintessential durable goods producer. Inventories play two major roles in our model. On the firm's side, inventories help manufacturer's smooth non-convex costs of production. On the consumer's side, higher levels of inventories provide more variety, thus making it easier to match consumers with their ideal vehicle. We find a tight link between inventories and prices both through inventory's production-smoothing and variety-increasing roles. Indeed, our model predicts that automakers' build-to-stock inventory management policy is responsible for four-tenths of the 9.0 percent decline (annual rate) in prices over the model year.To explain the covariation of prices, sales, and inventories for new automobiles over the model year,we formulate an industry model. On the consumer side, we estimate preferences for automobiles by employing the econometric methodology developed in the discrete-choice literature (for example, Berry, Levinsohn, and Pakes, 1995;Goldberg, 1995;and Petrin, 2002; to name a few). Our approach differs from the standard one in three ways: First, motivated by Kahn (1987Kahn ( , 1992 who finds that inventories are productive in generating greater sales at a given price, we include an inventory-based measure of variety in the consumer's indirect utility function. Second, we estimate our demand-side model at a quarterly, rather than ...

Rational Inattention and Energy Efficiency

“…The slope of the coefficients from this regression has a very similar shape to the one shown in Figure 7. The coefficients indicate that prices decline by 13 percent over the 25 months in the sample, which is broadly similar to the average annual model year decline in price of 9.0 percent estimated by Copeland, Dunn, and Hall (2011).…”

Interest Rates and the Market for New Light Vehicles

“…6 In the literature on industrial organization, there are papers that model both sides of a durable goods market, such as Nair (2007), Esteban and Shum (2007), Goettler and Gordon (2009), Copeland, Dunn, and Hall (2011), and Chen, Esteban, and Shum (2013. Relative to our paper, this literature focuses on di↵erent questions and employs di↵erent methods.…”

Interest Rates and the Market for New Light Vehicles

“…Copeland, Dunn, and Hall () estimate a similar elasticity (how changes in an inventory‐based variety measure increase sales) to be roughly 0.5. Their discrete‐choice static model identifies this elasticity from the variation in the cross‐section, whereas in the current paper the available supply elasticity is pinned down by the steady state, specifically, by the mean values of the ratios of available supply to sales and output to sales.…”

“…In the literature on industrial organization, there are papers that model both sides of a durable goods market, such as Nair (), Esteban and Shum (), Goettler and Gordon (), Copeland, Dunn, and Hall (), and Chen, Esteban, and Shum (). Relative to our paper, this literature focuses on different questions and employs different methods.…”