Research Article

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

  1. Adam Copeland1,
  2. George Hall2,*

Article first published online: 28 SEP 2009

DOI: 10.1002/jae.1120

Issue

Journal of Applied Econometrics

Journal of Applied Econometrics

Volume 26, Issue 2, pages 232–269, March 2011

Additional Information

How to Cite

Copeland, A. and Hall, G. (2011), The response of prices, sales, and output to temporary changes in demand. J. Appl. Econ., 26: 232–269. doi: 10.1002/jae.1120

Author Information

  1. 1

    Bureau of Economic Analysis, Washington, DC, USA

  2. 2

    Department of Economics, Brandeis University, Waltham, MA, USA

*Department of Economics, Brandeis University, 415 South Street, Waltham, MA 02454-9110, USA.

Publication History

  1. Issue published online: 28 SEP 2009
  2. Article first published online: 28 SEP 2009
  3. Manuscript Revised: 29 JAN 2009
  4. Manuscript Received: 21 NOV 2007

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Abstract

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.

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