Working Paper: NBER ID: w15590
Authors: Meghan R. Busse; Christopher R. Knittel; Florian Zettelmeyer
Abstract: The dramatic increase in gasoline prices from close to $1 in 1999 to $4 at their peak in 2008 made it much more expensive for consumers to operate an automobile. In this paper we investigate whether consumers have adjusted to gasoline price changes by altering what automobiles they purchase and what prices they pay. We investigate these effects in both new and used car markets. We find that a $1 increase in gasoline price changes the market shares of the most and least fuel-efficient quartiles of new cars by +20% and -24%, respectively. In contrast, the same gasoline price increase changes the market shares of the most and least fuel-efficient quartiles of used cars by only +3% and -7%, respectively. We find that changes in gasoline prices also change the relative prices of cars in the most fuel-efficient quartile and cars in the least fuel-efficient quartile: for new cars the relative price increase for fuel-efficient cars is $363 for a $1 increase in gas prices; for used cars it is $2839. Hence the adjustment of equilibrium market shares and prices in response to changes in usage cost varies dramatically between new and used markets. In the new car market, the adjustment is primarily in market shares, while in the used car market, the adjustment is primarily in prices. We argue that the difference in how gasoline costs affect new and used automobile markets can be explained by differences in the supply characteristics of new and used cars.
Keywords: Gasoline Prices; Automobile Markets; Fuel Efficiency
JEL Codes: L10; L50; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Gasoline prices (L90) | Market share of least fuel-efficient quartile of new cars (L99) |
| Gasoline prices (L90) | Market share of most fuel-efficient quartile of new cars (L94) |
| Gasoline prices (L90) | Market share of least fuel-efficient quartile of used cars (L99) |
| Gasoline prices (L90) | Market share of most fuel-efficient quartile of used cars (L94) |
| Gasoline prices (L90) | Relative price of fuel-efficient new cars (Q41) |
| Gasoline prices (L90) | Relative price of fuel-efficient used cars (Q31) |