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Can proactive fuel economy strategies help automakers mitigate fuel price risk?


  • McManus, Walter


Detroit automakers have opposed mandated improvements in fuel economy since legislation was first proposed in the 1970’s. Their opposition is based, among other considerations, on the assumption that their customers value fuel economy only when fuel prices are high. This paper presents the findings of our on-going research that strongly refutes this assumption. Using data on sales, prices, and attributes of vehicles in 2005, we find that consumers are willing to pay, on average, $578 per MPG for higher fuel economy. At the price of gasoline prevailing in 2005, $2.30 per gallon, the $578 per MPG that consumers are willing to pay for fuel economy implies that consumers put more weight in choosing vehicles on future fuel savings than most analysts (including ourselves) had thought. The paper incorporates these new data-driven estimates of the value of fuel economy into an automotive market simulation model that has three components: a consumer demand function that predicts consumers’ vehicle choices as functions of vehicle price, fuel price, and vehicle attributes (the new estimates of the value of fuel economy are used to set the parameters of the demand function); an engineering and economic evaluation of feasible fuel economy improvements by 2010; and a game theoretic analysis of manufacturers’ competitive interactions. Using our model, we estimated the market shares and profits of automakers in 128 separate scenarios defined by alternative plausible values for the price of fuel and consumers’ discount rates. Under the fuel price risks and the competitive risks that automakers face, our analysis concludes that a proactive strategy of pursuing fuel economy improvements— above and beyond what is required by law—would increase annual profits for Ford ($0.5 billion to $1.4 billion), GM ($0.2 billion to $0.5 billion, and DaimlerChrysler ($0.1 billion). Even if the uncertainty over fuel price were removed, all three automakers would increase profits by pursuing fuel economy improvements, though the gains are smaller with fuel at $2.00/gallon.

Suggested Citation

  • McManus, Walter, 2006. "Can proactive fuel economy strategies help automakers mitigate fuel price risk?," MPRA Paper 3460, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:3460

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    References listed on IDEAS

    1. Molly Espey & Santosh Nair, 2005. "Automobile Fuel Economy: What Is It Worth?," Contemporary Economic Policy, Western Economic Association International, vol. 23(3), pages 317-323, July.
    2. Steven Berry & James Levinsohn & Ariel Pakes, 2004. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 68-105, February.
    3. David L. Greene & K.G. Duleep & Walter McManus, 2004. "Future Potential of Hybrid and Diesel Powertrains in the U.S. Light-Duty Vehicle Market," Industrial Organization 0410003, EconWPA.
    4. Kenneth E. Train & Clifford Winston, 2007. "Vehicle Choice Behavior And The Declining Market Share Of U.S. Automakers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1469-1496, November.
    5. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, May.
    6. Ye Feng & Don Fullerton & Li Gan, 2013. "Vehicle choices, miles driven, and pollution policies," Journal of Regulatory Economics, Springer, vol. 44(1), pages 4-29, August.
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    Cited by:

    1. Gallagher, Kelly Sims & Muehlegger, Erich, 2011. "Giving green to get green? Incentives and consumer adoption of hybrid vehicle technology," Journal of Environmental Economics and Management, Elsevier, vol. 61(1), pages 1-15, January.
    2. Roland-Holst, David, 2008. "Energy efficiency, innovation, and job creation in California," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt7qz3b977, Department of Agricultural & Resource Economics, UC Berkeley.
    3. McManus, Walter, 2007. "Economic analysis of feebates to reduce greenhouse gas emissions from light vehicles for California," MPRA Paper 3461, University Library of Munich, Germany.

    More about this item


    automotive industry; automakers; fuel econnomy; willingness to pay; game theory; consumer demand for fuel economy; Corporate Average Fuel Economy;

    JEL classification:

    • Q59 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Other
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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    This item is featured on the following reading lists or Wikipedia pages:
    1. Studies on the automobile industry


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