Prices, Production and Inventories over the Automotive Model Year

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, the retail price (net of rebates and financing incentives) falls 9.4 percent over the 17-month model year. Concurrently, both sales and inventories are hump-shaped. To explain these time-series, we formulate a market equilibrium model for new automobiles. On the demand side, we use our micro-level data to estimate aggregate demand curves for each vehicle and vintage over the model year. On the supply side, we solve a dynamic programming model of an automaker who, while only able to produce one vintage of a product at a time, may accumulate inventories and sell multiple vintages of the same product simultaneously. Declining prices and hump-shaped sales and inventories are consistent with optimal inventory management. Further, 3/4 of the price decline is driven by inventory control.