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Automobile Prices and Quality: Did the Gasoline Price Increase Change Consumer Tastes in the U.S.?

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  • Makoto Ohta

Abstract

Did the 1973 and 1979 gasoline price rises change consumer views about the relative quality of different cars? This question is investigated by testing the null hypothesis that imputed characteristic prices have remained constant over time. A hedonic model that takes gasoline costs into account is developed and some of its theoretical implications are outlined.The statistical methods required for its estimation and for the testing of the particular null hypothesis are discussed and then used to analyze the prices of U.S. passenger cars in the used market during 1970-1981. If one does not take gasoline costs into account in such computations one must conclude that consumers changed their relative evaluations of car qualities significantly in both periods: October 1973 to April 1974 and April to October1979. However, when gasoline efficiency terms are included in the model,the estimated relative qualities are much more stable over time, with no period showing significant changes, and it is possible to maintain the "constancy of tastes" assumption. Since the main model adjusts not only for the effect of gasoline price increases but also for the effects of changes in other prices and income, we develop two alternative approaches which adjust solely for the increase in gasoline prices. Applying these to the 1979 period we find that a significant fraction of the coefficient change that did occur during this period can be attributed to the gasoline price increase alone,indicating that this is indeed a major component of what happened.

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  • Makoto Ohta, 1983. "Automobile Prices and Quality: Did the Gasoline Price Increase Change Consumer Tastes in the U.S.?," NBER Working Papers 1211, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1211
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    1. Makoto Ohta & Zvi Griliches, 1976. "Automobile Prices Revisited: Extensions of the Hedonic Hypothesis," NBER Chapters, in: Household Production and Consumption, pages 325-398, National Bureau of Economic Research, Inc.
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    3. Muellbauer, John, 1974. "Household Production Theory, Quality, and the "Hedonic Technique."," American Economic Review, American Economic Association, vol. 64(6), pages 977-994, December.
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    6. Frederick V. Waugh, 1928. "Quality Factors Influencing Vegetable Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 10(2), pages 185-196.
    7. 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.
    8. Berndt, Ernst R., 1983. "Quality adjustment in empirical demand analysis," Working papers 1397-83., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    1. Arawomo, Damilola F. & Osigwe, Augustine C., 2016. "Nexus of fuel consumption, car features and car prices: Evidence from major institutions in Ibadan," Renewable and Sustainable Energy Reviews, Elsevier, vol. 59(C), pages 1220-1228.
    2. Galarraga, Ibon & Ramos, Ana & Lucas, Josu & Labandeira, Xavier, 2014. "The price of energy efficiency in the Spanish car market," Transport Policy, Elsevier, vol. 36(C), pages 272-282.
    3. C. Lanier Benkard & Patrick Bajari, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," NBER Working Papers 9980, National Bureau of Economic Research, Inc.
    4. Robert C. Feenstra, 1986. "Gains from Trade in Differentiated Products: Japanese Compact Trucks," NBER Working Papers 1978, National Bureau of Economic Research, Inc.
    5. Benkard, C. Lanier & Bajari, Patrick, 2003. "Hedonic Price Indexes with Unobserved Product Characteristics, and Application to PC's," Research Papers 1841, Stanford University, Graduate School of Business.
    6. Hyberg, Bengt & Uri, Noel D. & Oliveira, Valencia, 1996. "The quality characteristics of Japanese soybean imports," Japan and the World Economy, Elsevier, vol. 8(1), pages 81-98, March.
    7. Chiraz Karamti & Lukasz Grzybowski, 2010. "Hedonic study on mobile telephony market in France: pricing–quality strategies," Netnomics, Springer, vol. 11(3), pages 255-289, October.
    8. Leheyda, Nina, 2008. "Private Incentives to Innovate: Interplay of New Products and Brand-Name Reputation," ZEW Discussion Papers 08-120, ZEW - Leibniz Centre for European Economic Research.
    9. Robert Witt, 1997. "The demand for car fuel efficiency: some evidence for the UK," Applied Economics, Taylor & Francis Journals, vol. 29(9), pages 1249-1254.

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