The effect of fuel economy standards on the U.S. automotive market: An hedonic demand analysis

Abstract

Both federal Corporate Average Fuel Economy (CAFE) regulations and market forces resulting from sharply higher gasoline prices are forcing auto manufacturers to dramatically improve the fuel economy of cars built for sale in the United States. Because these fuel economy improvements are being accompanied by significant changes in other car attributes that are believed to be important determinants of consumer choice among car models, there is currently considerable uncertainty about the likely effects on the automotive market. This paper analyzes market demand for automobile attributes, including those that are likely to be affected by fuel economy improvements, and presents estimates of dollar market valuations of key attributes. Market share effects of various assumed changes in car prices are analyzed in order to gain insight into competition among car models and the sensitivity of new car fleet average fuel economy to possible manufacturer or size-class-specific pricing strategies. Effects of gasoline price changes are also analyzed. These analyses make use of the hedonic demand model (also known as the “random coefficients logit model”), an extension of the multinomial logit probability choice model which explicitly incorporates variations in consumer tastes across the car-buying population. A data base measuring attributes and observed market shares of some 150 car models and submodels for the 1977 and 1978 model years is used.