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The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom

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  • McManus, Walter

Abstract

This paper examines the link between fuel prices and sales of cars and trucks. U.S. automakers have long denied that such a link exists. One source of this false belief is an obsession with the crude count of units sold, equating Hummers with Minis. Another source is the conventional “wisdom” that Americans are unwilling to pay for fuel economy. The paper presents theoretical reasons and market evidence that refute Detroit’s conventional wisdom. American manufacturers’ reaction to rising fuel prices over the last few years revealed the shortcomings of the U.S. automakers’ recent product and powertrain strategies. The effect of rising fuel prices has, in effect, been offset by reducing prices of vehicles in inverse proportion to fuel economy. Thus, unit sales of large SUVs could be maintained, but their revenue (and profit) fell because vehicle prices were cut, directly or indirectly. The paper concludes with a few practical guidelines that business economists should use to prevent their companies from experiencing the recent massive losses experienced by the U.S. automobile industry.

Suggested Citation

  • McManus, Walter, 2007. "The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom," MPRA Paper 3463, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:3463
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    File URL: https://mpra.ub.uni-muenchen.de/3463/1/MPRA_paper_3463.pdf
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    References listed on IDEAS

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    1. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 239-253.
    2. Adam Copeland & George Hall, 2011. "The response of prices, sales, and output to temporary changes in demand," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 232-269, March.
    3. Carol Corrado & Wendy E. Dunn & Maria Ward Otoo, 2006. "Incentives and prices for motor vehicles: what has been happening in recent years?," Finance and Economics Discussion Series 2006-09, Board of Governors of the Federal Reserve System (U.S.).
    4. Zvi Griliches, 1961. "Hedonic Price Indexes for Automobiles: An Econometric of Quality Change," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 173-196, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Martin, Elliot William, 2009. "New Vehicle Choices, Fuel Economy and Vehicle Incentives: An Analysis of Hybrid Tax Credits and Gasoline Tax," University of California Transportation Center, Working Papers qt6sz198c2, University of California Transportation Center.
    2. Tsvetanov, Tsvetan & Segerson, Kathleen, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working Paper series 148295, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
    3. Shigeru Matsumoto, 2018. "Consumer valuation of energy-saving features of residential air conditioners with hedonic and choice models," Empirical Economics, Springer, vol. 55(4), pages 1779-1806, December.
    4. Chen, Anning, 2011. "Reliable GPS Integer Ambiguity Resolution," University of California Transportation Center, Working Papers qt9gs0t2f9, University of California Transportation Center.
    5. Eric Kateta Tshiakambila & Joseph Chisasa, 2017. "Food Inflation and Passenger Vehicle Purchases in South Africa: Cointegration, Short Run Dynamics and Causality," Journal of Economics and Behavioral Studies, AMH International, vol. 9(5), pages 122-134.
    6. Martin, Elliott William, 2009. "New Vehicle Choice, Fuel Economy and Vehicle Incentives: An Analysis of Hybrid Tax Credits and the Gasoline Tax," University of California Transportation Center, Working Papers qt5gd206wv, University of California Transportation Center.

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    More about this item

    Keywords

    automotive industry; fuel prices; vehicle sales; American automakers;
    All these keywords.

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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    1. Studies on the automobile industry

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