Oil Shocks, Segment Shifts, and Oil Shocks, Segment Shifts, and Capacity Utilization in the U.S. Capacity Utilization in the U.S.
Automobile Industry: What has Automobile Industry: What has changed in 30 Years?changed in 30 Years?
ByBy
Valerie A. Ramey and Daniel J. VineValerie A. Ramey and Daniel J. Vine
Questions Asked
1. Did gas prices affect the auto industry similarly in the 1970s and 1980s and the 2000s?
2. Were the mismatches between capacity and demand across vehicle segments similar in each era?
3. How much of the decline in capacity utilization in the auto industry can be attributed to gas prices?
4. What margins did the automobile companies use to achieve their production reductions?
Overview of Events During the Past 4 Decades
Real Price of Gasoline
Average of all grades, relative to headline CPI
60
80
10
01
20
14
01
60
log
ind
ex
1970 1975 1980 1985 1990 1995 2000 2005 2010
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
05
10
15
20
25
pe
rce
nt
1970 1975 1980 1985 1990 1995 2000 2005 2010
U.S. Light Vehicle Sales8
10
12
14
16
18
20
22
mill
ion
s o
f un
its, s
aa
r
1970 1975 1980 1985 1990 1995 2000 2005 2010
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
Domestic Sales Shares
Percentage of domestic vehicles sold
“Domestic” is defined as cars produced in North America
1020
3040
50
1972 1975 1978 1981 1984
2025
3035
4045
1994 1997 2000 2003 2006 2009
Small cars
Standard carsSmall cars, CUVs
Full-size trucks, vans, utilities
2040
6080
100
120
1972 1975 1978 1981 1984
4060
8010
012
0
1994 1997 2000 2003 2006 2009
Domestic Days’ Supply
“Domestic” is defined as cars produced in North America
Small cars
Standard carsSmall cars,
CUVs
Full-size trucks, vans, utilities
Bresnahan-Ramey Measure of Capacity Mismatch
11
1
2
i
AtitA
t
itDSt DSDS
INV
INVV
A high dispersion in days’ supply across segments indicates that an imbalance exists between the composition of capacity and the composition of demand.
Dispersion of Days’ Supply
Variance of days’ supply across 11 market segments
05
00
10
00
15
00
1975 1980 1985 1990 1995 2000 2005 2010
How do increases in gasoline prices affect the auto industry?
3 possible effects:
1. Increase in costs of production
2. Decrease in overall sales
3. Shifts in composition of sales
(1) is probably not as important. We will focus on (2) and (3)
Stylized Model
Purpose:
1.To investigate various channels through which gas prices affect the auto industry
2.To determine conditions under which segment shifts can affect capacity utilization
The Importance of the Shape of Marginal Costs
for Segment Shift Effects on Capacity Utilization
MC
Q
MR
MC
MR
Q
Linear-Quadratic Model Capacity-Constraint Model
Stylized Model
The monopolist produces cars for 2 segments.
0
221100 )]([t
ttttt tCostSPSPE
222122
211111
2121
)(2
1)(
2
1
)(
tttt
tttt
SISI
OHOHRHRHtCost
2,1, iKRH it
Constraints and Demand
2,1,1 iSOHRHII ititititit
1 0 1 1 1, wheret t t t t t tS P useg uagg useg useg
2 0 1 2 1, wheret t t t t t tS P useg uagg uagg uagg
Inventory identity:
Demand:
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
Effect of a Negative Aggregate Shock
3740
43
0 6 12 18 24
Sales
5360
67
0 6 12 18 24
Prices27
4053
0 6 12 18 24
Capacity utilization
2.42
2.54
0 6 12 18 24
Days' supply
Effect of a Segment Shift Shock: Segment Variables
3740
43
0 6 12 18 24
Sales
5360
67
0 6 12 18 24
Prices27
4053
0 6 12 18 24
Capacity utilization
2.42
2.54
0 6 12 18 24
Days' supply
Effect of a Segment Shift Shock: Aggregate Variables0
.003
.006
0 6 12 18 24
Variance of days' supply
7580
0 6 12 18 24
Aggregate Capacity Utilization
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
Capacity Utilization
Percent, light vehicle assembly2
04
06
08
01
00
pe
rce
nt
1975 1980 1985 1990 1995 2000 2005 2010
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 ordered first.
ttt UYLAY 1)(
Effect of a Shock to Consumer Sentiment about Gas Prices
January 1972 to March 2009
-.5
0.5
11
.5
0 6 12 18 24 30 36 42 48
Gasoline Consumer Sentiment
-.5
0.5
1
0 6 12 18 24 30 36 42 48
Days' Supply
-10
01
02
03
0
0 6 12 18 24 30 36 42 48
Dispersion in Days' Supply-1
.5-1
-.5
0.5
0 6 12 18 24 30 36 42 48
Capacity Utilization
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
Effects Estimated Over Different Subsamples0
.2.4
.6.8
1
0 6 12 18 24 30 36 42 48
Gasoline Consumer Sentiment
-.2
0.2
.4.6
0 6 12 18 24 30 36 42 48
Days' Supply
-10
01
02
03
0
0 6 12 18 24 30 36 42 48
Dispersion in Days' Supply
-1-.
50
.5
0 6 12 18 24 30 36 42 48
Capacity Utilization
1990-2009
1972-1989
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.
Effects of Gasoline Sentiment Shock: Counterfactuals
-.8
-.6
-.4
-.2
0
0 6 12 18 24 30 36 42 48
Constant Days' Supply
-.8
-.6
-.4
-.2
0
0 6 12 18 24 30 36 42 48
Constant Dispersion of Days' Supply
baselinebaseline
counterfactual
counterfactual
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.
Historical Movements in Utilization and Dispersion
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.
Margins of Adjustment used to Curtail Auto ProductionDetroit 3 Firms; North American Production by Model Year
Percent share of adjustment attributable to . . .
Peak(MY)
Trough(MY)
Change inProduction(millions of
units)
Overtime Hours
InventoryAdjustments
LinespeedChanges
ShiftChanges
PlantExit/Entry
1973 1974 -1.4 17 42 15 31 -5
1979 1982 -4.7 8 19 7 45 28
1999 2001 -1.9 44 30 -5 13 8
2002 2006* -3.1 13 12 36 13 55
Isolated Margins of Adjustment:Detroit Three Motor Vehicle Output
400
800
1200
1600
Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Tho
usan
ds o
f uni
ts
400
800
1200
1600
Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Tho
usan
ds o
f uni
ts
Overtime Hours
Temporary Closures
Isolated Margins of Adjustment:Detroit Three Motor Vehicle Output
400
800
1200
1600
Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Tho
usan
ds o
f uni
ts
400
800
1200
1600
Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04
Tho
usan
ds o
f uni
ts
Shifts
Plant Entry/Exit
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.
