AGGREGATION OVER PRODUCTS AND THE SPEED OF ADJUSTMENT IN INVENTORY MODELS

This paper demonstrates that aggregation across firms or products can result in a slow speed of adjustment when the underlying speeds of adj ustment are actually quite rapid. The reason for this is that the pric e and output decisions which alleviate inventory disequilibrium in one market impinge upon stocks in other markets through the demand and co st functions. It is shown that aggregation bias occurs except under a special set of circumstances and that the aggregate speed of adjustmen t understates the product-line speeds of adjustment when the goods are substitutes or there is a moderate degree of production cost interact ion in multi-product firms.