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Automobile replacement: a dynamic structural approach

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  • Schiraldi, Pasquale

Abstract

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

Suggested Citation

  • Schiraldi, Pasquale, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics 21780, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:21780
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    File URL: http://eprints.lse.ac.uk/21780/
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    References listed on IDEAS

    as
    1. Gautam Gowrisankaran & Marc Rysman, 2012. "Dynamics of Consumer Demand for New Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1173-1219.
    2. 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.
    3. Konishi, Hideo & Sandfort, Michael T., 2002. "Existence of stationary equilibrium in the markets for new and used durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 1029-1052, June.
    4. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
    5. 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.
    6. 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.
    7. 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, June.
    8. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    9. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    10. Brownstone, David & Train, Kenneth, 1998. "Forecasting new product penetration with flexible substitution patterns," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 109-129, November.
    11. Robert W. Hahn, 1995. "An Economic Analysis of Scrappage," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 222-242, Summer.
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    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • L92 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Railroads and Other Surface Transportation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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