Thesis (Ph. D.)--University of Rochester. Department of Economics, 2014.
This thesis conducts an examination of firm behavior in the auto industry as a response to new
federal legislation and business cycle fluctuations. Chapter 1 analyzes the gaming opportunities of
the new CAFE standard that sets lower fuel efficiency standards for larger vehicles and thus provides
an incentive for firms to increase vehicle size and ease compliance. I use an oligopolistic equilibrium
model of endogenous characteristic choice where firms choose to update a vehicle characteristic and
pay the associated fixed costs or keep the characteristic from the previous year unchanged. I estimate
a discrete-choice model of new vehicle demand and use a moment inequality approach to set-identify
the fixed costs of modifying characteristics. Simulations show that the new legislation will have no
market level impact on the size distribution with only a select few vehicles being upsized under the
new CAFE. I find that firms increase the average price of their new vehicles by $330-440 with a pricing
strategy that shifts demand away from less fuel-efficient vehicles toward more efficient alternatives
and place a larger price premium on vehicles with higher CAFE compliance costs. I show that models
without fixed costs significantly overestimate the impact of the legislation. Chapter 2 attempts to
answer two questions regarding inventory fluctuations. The first question is to what extent markups
drive inventory fluctuations throughout the business cycle. The second question is whether inventory
management can explain a “trade collapse” during the Great Recession. These questions are answered
by analyzing sales and inventory data on every vehicle model sold in the U.S. from 2004 to 2013.
The results indicate that there is a strong positive relationship between markups and the inventory-to-
sales ratio, corroborating predictions in the stock-out avoidance model. However, no evidence is
found to indicate that the inventory-to-sales ratio behaved differently between imports and domestics
during the Great Recession.
