MPG Illusion and Vehicle Choice: An Empirical Study of the Japanese Household Survey

Abstract

Previous studies have shown that people understand the future ancillary cost of durable goods such as an automotive vehicle. However, consumers tend to misunderstand the future benefits and costs of these goods. One of the most interesting discussions about consumer cognitive ability for future energy cost is the miles per gallon (MPG) illusion. In this study, we analyze people’s misunderstanding of the relationship between kilometers per liter (KPL) and the actual amount of fuel saved using vehicle owner survey data. We developed some questions to measure how much each person is involved with the MPG (or KPL) illusion. Additionally, our survey includes questions capturing some preferences affecting future fuel costs, such as time. Controlling for the most important respondent characteristics, such as income or gender, our empirical model analyzes the extent of the misunderstanding of how much actual KPL selections of personal auto vehicles are affected. We found that many Japanese consumers tend to misunderstand the relationship between KPL and actual fuel costs. Our results demonstrate that people who misunderstand the relationship tend to choose a higher 4.324 km per liter car than those who understand. This finding implies that the KPL illusion affects the KPL selection of consumers’ cars.