Abstract
This paper applies an extended version of the superior goods model to the UK car market. The model involves the estimation of separate equations for the demand for new cars and the rental price of used cars. We have allowed for the direct influence of quality on car demand by using a measure derived from hedonic price equations. We have employed three measures of the user cost, reflecting different assumptions about price expectations and the depreciation rate. The empirical results reject the forward-looking model in favor of the error correction formulation. Income, wealth and price elasticities for new and used cars support the superior goods hypothesis.
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