Ford's Model-T: Pricing over the Product Life Cycle

Abstract: The pricing decisions monopolistic firms make over time are determined by the interplay of demand- and supply-based considerations. Demand factors include exercising dynamic price discrimination and enhancing information diffusion about the product's characteristics. The main supply element is the possibility to exploit learning economies. Although in pricing data, demand and supply factors appear inter-linked in complex ways, I propose a methodology to separate them. I apply this procedure to the case of Ford's Model-T to disentangle by how much demand issues (as opposed to cost based factors) affected the level and slope of the observed price sequence. I also point out some issues regarding experience curve estimation and outline a technique that allows for endogenous generation of sales and unit cost predictions.