The Response of Prices, Sales, and Output to Temporary Changes in Demand

Adam Copeland and George Hall

No 11870, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks.

JEL-codes: D21 D42 E22 E23 L11 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-mac and nep-mic
Note: EFG IO
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Citations: View citations in EconPapers (3)

Published as Adam Copeland & George Hall, 2011. "The response of prices, sales, and output to temporary changes in demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 232-269, March.

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Related works:
Journal Article: The response of prices, sales, and output to temporary changes in demand (2011)
Working Paper: The Response of Prices, Sales, and Output to Temporary Changes in Demand (2006)
Working Paper: The Response of Prices, Sales, and Output to Temporary Changes in Demand (2005)
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