Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets
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.
We are grateful for helpful comments from Severin Borenstein, Igal Hendel, Ryan Kellogg, Jorge Silva-Risso, Scott Stern and seminar participants at the ASSA, Iowa State, Ohio State, UC Berkeley, Yale, MIT, University of British Columbia, University of Toronto, Cornell, Northwestern University, Chicago Federal Reserve Bank, University of Chicago, Texas A&M, and the University of Rochester. We also thank participants at the NBER 2008 Winter IO conference. We thank the University of California Energy Institute (UCEI) for financial help in acquiring data. Busse and Zettelmeyer gratefully acknowledge the support of NSF grants SES-0550508 and SES-0550911. Knittel thanks the Institute of Transportation Studies at UC Davis for support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.