YALE DEPARTMENT OF ECONOMICS
WORKING PAPER NO. 1

PRICES, PRODUCTION AND INVENTORIES
OVER THE AUTOMOTIVE MODEL YEAR

Adam Copeland, Wendy Dunn and George J. Hall

March 2005

Abstract....justified paragraph
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 typically 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.

Keywords: Dymanic pricing, Revenue management, Discrete-choice demand estimation, Build-to-stock inventory policy

JEL Classifications: D21, D42, E22, L11, L62