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Oil Shocks, Segment Shifts, and Capacity Utilization in the U.S. Automobile Industry: What has changed in 30 Years? PowerPoint Presentation
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Oil Shocks, Segment Shifts, and Capacity Utilization in the U.S. Automobile Industry: What has changed in 30 Years? By Valerie A. Ramey and Daniel J. Vine Questions Asked Did gas prices affect the auto industry similarly in the 1970s and 1980s and the 2000s?

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slide1

Oil Shocks, Segment Shifts, and Capacity Utilization in the U.S. Automobile Industry: What has changed in 30 Years?

By

Valerie A. Ramey and Daniel J. Vine

questions asked
Questions Asked
  • Did gas prices affect the auto industry similarly in the 1970s and 1980s and the 2000s?
  • Were the mismatches between capacity and demand across vehicle segments similar in each era?
  • How much of the decline in capacity utilization in the auto industry can be attributed to gas prices?
  • What margins did the automobile companies use to achieve their production reductions?
slide4

Real Price of Gasoline

Average of all grades, relative to headline CPI

slide5

Consumer Anxiety over Gasoline Prices

Percentage of respondents to the Reuters/University of Michigan Survey of Consumer Sentiment who cite high gasoline prices or shortages of gasoline as reasons that car‑buying conditions are poor

vehicle market segments
Vehicle Market Segments

Cars (5)

  • Subcompact
  • Compact
  • Intermediate
  • Full-size
  • Luxury

Light trucks (6)

  • Compact pickup
  • Small vans
  • Cross-utility vehicles
  • Full-size pickups
  • Large vans
  • Utility vans
slide8

Domestic Sales Shares

Percentage of domestic vehicles sold

Full-size trucks, vans, utilities

Small cars

Standard cars

Small cars, CUVs

“Domestic” is defined as cars produced in North America

slide9

Domestic Days’ Supply

Small cars

Full-size trucks, vans, utilities

Small cars,

CUVs

Standard cars

“Domestic” is defined as cars produced in North America

bresnahan ramey measure of capacity mismatch
Bresnahan-Ramey Measure of Capacity Mismatch

A high dispersion in days’ supply across segments indicates that an imbalance exists between the composition of capacity and the composition of demand.

slide11

Dispersion of Days’ Supply

Variance of days’ supply across 11 market segments

how do increases in gasoline prices affect the auto industry
How do increases in gasoline prices affect the auto industry?
  • 3 possible effects:
  • Increase in costs of production
  • Decrease in overall sales
  • Shifts in composition of sales
  • (1) is probably not as important. We will focus on (2) and (3)
stylized model
Stylized Model
  • Purpose:
  • To investigate various channels through which gas prices affect the auto industry
  • To determine conditions under which segment shifts can affect capacity utilization
slide14

The Importance of the Shape of Marginal Costs

for Segment Shift Effects on Capacity Utilization

MC

MC

MR

MR

Q

Q

Linear-Quadratic Model

Capacity-Constraint Model

slide15

Stylized Model

The monopolist produces cars for 2 segments.

slide16

Constraints and Demand

Inventory identity:

Demand:

slide17

Calibration

Monthly discount factor: β = 0.997

Desired days’ supply: φ = 2.5 months of sales

Penalty for deviation from days’ supply: α = 0.1

Capacity: K = 40

Steady-state output: Y = 40

Elasticity of demand in S-S: elasticity = -1.5

Autocorrelation of shocks: ρ = 0.75

investigating the role of gas prices empirically
Investigating the Role of Gas Prices Empirically

We now study the behavior of capacity utilization in the data and estimate a model that allows us to determine the importance of gas price shocks

slide22

Capacity Utilization

Percent, light vehicle assembly

var investigation of gas price role
VAR Investigation of Gas Price Role

Y consists of :

  • Consumer sentiment about gas prices
  • Days-supply of domestic cars (DS)
  • Variance of days supply
  • Capacity utilization (CU)

A(L) is a matrix of polynomials in the lag operator L.

U is a vector of disturbances.

Identification: Choleski decomposition with consumer sentiment orderedfirst.

sample stability
Sample Stability

How has the response changed from the early period to the recent period?

To answer this question, we estimated the VAR over two subsamples:

1972 – 1989, 1990 – 2009

relative importance of the aggregate channel vs the segment shifts channel
Relative Importance of the Aggregate Channel vs. the Segment Shifts Channel
  • How does the response of capacity utilization to gas prices change if we shut down the particular channel?
  • To answer this question, we perform the following counter-factual experiment:
  • To shut down the aggregate channel, we simulate the estimated VAR, not allowing aggregate days’ supply to change.
  • To shut down the segment shifts channel, we simulate the estimated VAR, not allowing the dispersion of days’ supply to change.
slide28

Effects of Gasoline Sentiment Shock: Counterfactuals

counterfactual

counterfactual

baseline

baseline

importance of gas price shocks to capacity utilization
Importance of Gas Price Shocks to Capacity Utilization

How important have gas price shocks been to capacity utilization during particular historical periods?

To answer this, we decompose the movements in capacity utilization into those due to gas price shocks versus other shocks.

how the detroit 3 changed their production
How the Detroit 3 Changed their Production

We use the plant level data collected by Bresnahan and Ramey (1993) and Ramey and Vine (2004, 2006) to study the margins of adjustment of the Detroit 3.

slide32
Margins of Adjustment used to Curtail Auto ProductionDetroit 3 Firms; North American Production by Model Year
isolated margins of adjustment detroit three motor vehicle output
Isolated Margins of Adjustment:Detroit Three Motor Vehicle Output

Overtime Hours

Temporary Closures

conclusion
Conclusion
  • In many ways, the effect of gas prices on the auto industry during the last 10 years has been similar to the effect during the 1970s and 1980s.
  • Shifts in demand across segments continues to be an important channel for the effect of gas prices on the auto industry.