Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel Economy

Posted by D. Daniel Sokol

Ashley Langer of Berkeley - Department of Economics and Nathan Miller of DOJ Antitrust have a new paper on Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel Economy.

ABSTRACT: The relationship between gasoline prices and the demand for vehicle fuel e±ciency is im- portant for environmental policy but poorly understood in the academic literature. We provide empirical evidence that automobile manufacturers price as if consumers respond to gasoline prices. We derive a reduced-form regression equation from theoretical micro-foundations and estimate the equation with nearly 300,000 vehicle-week-region observations over the period 2003- 2006. We ¯nd that vehicle prices generally decline in the gasoline price. The decline is larger for ine±cient vehicles, and the prices of particularly e±cient vehicles actually rise. Structural estimation that ignores these e®ects underestimates consumer preferences for fuel e±ciency.