Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets

56 Pages Posted: 22 Dec 2009 Last revised: 6 Feb 2022

See all articles by Meghan R. Busse

Meghan R. Busse

University of California, Berkeley - Haas School of Business

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR); National Bureau of Economic Research (NBER)

Florian Zettelmeyer

Northwestern University - Kellogg School of Management

Date Written: December 2009

Abstract

The dramatic increase in gasoline prices from close to $1 in 1999 to $4 at their peak in 2008 made it much more expensive for consumers to operate an automobile. In this paper we investigate whether consumers have adjusted to gasoline price changes by altering what automobiles they purchase and what prices they pay. We investigate these effects in both new and used car markets. We find that a $1 increase in gasoline price changes the market shares of the most and least fuel-efficient quartiles of new cars by +20% and -24%, respectively. In contrast, the same gasoline price increase changes the market shares of the most and least fuel-efficient quartiles of used cars by only +3% and -7%, respectively. We find that changes in gasoline prices also change the relative prices of cars in the most fuel-efficient quartile and cars in the least fuel-efficient quartile: for new cars the relative price increase for fuel-efficient cars is $363 for a $1 increase in gas prices; for used cars it is $2839. Hence the adjustment of equilibrium market shares and prices in response to changes in usage cost varies dramatically between new and used markets. In the new car market, the adjustment is primarily in market shares, while in the used car market, the adjustment is primarily in prices. We argue that the difference in how gasoline costs affect new and used automobile markets can be explained by differences in the supply characteristics of new and used cars.

Suggested Citation

Busse, Meghan R. and Knittel, Christopher R. and Zettelmeyer, Florian, Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets (December 2009). NBER Working Paper No. w15590, Available at SSRN: https://ssrn.com/abstract=1525768

Meghan R. Busse (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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HOME PAGE: http://faculty.haas.berkeley.edu/meghan/index.html

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Center for Energy and Environmental Policy Research (CEEPR) ( email )

One Amherst Street, E40-279
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Florian Zettelmeyer

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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