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

2009; Wiley; Volume: 26; Issue: 2 Linguagem: Inglês

10.1002/jae.1120

1099-1255

Adam Copeland, George Hall,

Merger and Competition Analysis

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. Copyright © 2009 John Wiley & Sons, Ltd.