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Automobile replacement: a dynamic structural approach

  • Pasquale Schiraldi

This paper specifies and estimates a structural dynamic model of consumer demand for newand used durable goods. Its primary contribution is to provide an explicit estimationprocedure for transaction costs, which are crucial to capturing the dynamic nature ofconsumer decisions. In particular, transaction costs play a key role in determining consumerreplacement behavior in both primary and secondary markets for durable goods. The uniquedata set used in this paper has been collected by the Italian Motor Registry and covers theperiod from 1994 to 2004. It includes information about sales dates for individual cars overtime as well as the initial stock of cars in the sample period. Identification of transactioncosts is achieved from the variation in the share of consumers choosing to hold a given cartype each period, and from the share of consumers choosing to purchase the same car typethat period. Specifically, I estimate a random coefficients discrete choice model thatincorporates a dynamic optimal stopping problem in the spirit of Rust (1987). I apply thismodel to evaluate the impact of scrappage subsidies on the Italian automobile market in 1997and 1998.

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Article provided by RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 42 (2011)
Issue (Month): 2 (06)
Pages: 266-291

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Handle: RePEc:bla:randje:v:42:y:2011:i:2:p:266-291
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  1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  2. Brownstone, David & Train, Kenneth, 1999. "Forecasting new product penetration with flexible substitution patterns," University of California Transportation Center, Working Papers qt3tb6j874, University of California Transportation Center.
  3. Susanna Esteban & Matthew Shum, 2007. "Durable-goods oligopoly with secondary markets: the case of automobiles," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 332-354, 06.
  4. Brett R. Gordon, 2009. "A Dynamic Model of Consumer Replacement Cycles in the PC Processor Industry," Marketing Science, INFORMS, vol. 28(5), pages 846-867, 09-10.
  5. Konishi, H. & Sandfort, M.T., 2000. "Existence of Stationary Equilibrium in the Markets for New and Used Durable Goods," Papers 00-8, U.S. Department of Justice - Antitrust Division.
  6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  7. Robert W. Hahn, 1995. "An Economic Analysis of Scrappage," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 222-242, Summer.
  8. Jerome Adda & Russell Cooper, 1997. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," NBER Working Papers 6048, National Bureau of Economic Research, Inc.
  9. Robert H. Porter & Peter Sattler, 1999. "Patterns of Trade in the Market for Used Durables: Theory and Evidence," NBER Working Papers 7149, National Bureau of Economic Research, Inc.
  10. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
  11. Gautam Gowrisankaran & Marc Rysman, 2007. "Dynamics of Consumer Demand for New Durable Goods," Boston University - Department of Economics - Working Papers Series WP2007-024, Boston University - Department of Economics.
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