Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, March 4, 2009

The Dynamics of Automobile Expenditures

Posted by D. Daniel Sokol

Adam Copeland of the Department of Commerce has an interesting new working paper on The Dynamics of Automobile Expenditures.

ABSTRACT: This paper presents a dynamic demand model for light motor vehicles. Consumers solve an optimal stopping problem to decide if they want a new automobile and when in the model year to purchase it. This dynamic approach allows us to determine how the mix of consumers evolves over the model year and to measure consumers’ substitution patterns across products and time. We find that temporal substitution is significant, driving substitution patterns to a much greater extent than cross-sectional substitution or the entry and exit of consumers from the market. Through counterfactuals, we show that because consumers will temporally substitute to a large degree, not accounting for automakers’ dynamic pricing strategies will substantially overstate the gains to using pricing incentives. Further, we show that the large price discounts that automakers’ typically offer at the end of the model year result in price discrimination, by inducing price-sensitive consumers to delay their new vehicle purchase until the latter months of the model year. Keywords: price

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