The response of prices, sales, and output to temporary changes in demand

✍ Scribed by Adam Copeland; George Hall

• Publisher: John Wiley and Sons
• Year: 2009
• Tongue: English
• Weight: 313 KB
• Volume: 26
• Category: Article
• ISSN: 0883-7252
• DOI: 10.1002/jae.1120

✦ Synopsis

We determine empirically how automakers accommodate shocks to demand. Using data on production, sales, and transaction prices, we estimate a dynamic profit maximization model of the firm. We demonstrate that when an automaker is hit with a vehicle-specific demand shock, sales respond immediately and prices respond very modestly. Further, when accounting for non-convexities in the cost function, production responds with a delay. Over time, shocks are absorbed almost entirely through adjustments in sales and production rather than prices. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the 11 September 2001 terrorist attacks.