Equilibrium Trade in Automobile Markets

65 Pages Posted: 24 Jul 2019

See all articles by Kenneth Gillingham

Kenneth Gillingham

Yale University

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Anders Munk-Nielsen

University of Copenhagen - Department of Economics

John Rust

Department of Economics, Georgetown University

Bertel Schjerning

University of Copenhagen - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

We introduce a computationally tractable dynamic equilibrium model of the automobile market where new and used cars of multiple types (e.g. makes/models) are traded by heterogeneous consumers. Prices and quantities are determined endogenously to equate supply and demand for all car types and vintages, along with the ages at which cars are scrapped. The model allows for transactions costs, taxes, flexible specifications of car characteristics, consumer preferences, and heterogeneity. We apply the model to two examples: a revenue-neutral replacement of the new vehicle registration tax with a higher fuel tax and a hypothetical "merger to monopoly" in an oligopolistic new car market. We show substantial gains in consumer welfare from the tax policy change, as well as important effects on government revenues, automobile prices, driving, fuel consumption and CO2 emissions, while the merger leads to substantial welfare losses.

Keywords: secondary markets, trade, consumer heterogeneity, transactions costs, dynamic programming, extreme value distribution, dynamic discrete choice, multinomial logit model, stationary equilibrium, Markov chains, invariant distributions

JEL Classification: D430, D610, H210, H230, L900, Q400, Q580

Suggested Citation

Gillingham, Kenneth and Iskhakov, Fedor and Munk-Nielsen, Anders and Rust, John and Schjerning, Bertel, Equilibrium Trade in Automobile Markets (2019). CESifo Working Paper No. 7650. Available at SSRN: https://ssrn.com/abstract=3422231

Kenneth Gillingham (Contact Author)

Yale University ( email )

New Haven, CT 06511
United States
203-436-5465 (Phone)

HOME PAGE: http://www.yale.edu/gillingham

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6 Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Anders Munk-Nielsen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

John Rust

Department of Economics, Georgetown University ( email )

Washington, DC 20057
United States
1-202-687-6806 (Phone)
1-202-687-6102 (Fax)

Bertel Schjerning

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

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