Inventories and the automobile market

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.