The Effect of Fuel Price Changes on Fleet Demand for New Vehicle Fuel Economy

33 Pages Posted: 28 May 2020

See all articles by Benjamin Leard

Benjamin Leard

Resources for the Future

Virginia McConnell

University of Maryland; Resources for the Future

Christy Zhou

Clemson University, John E. Walker Department of Economics

Date Written: March 2019

Abstract

New vehicle purchases by private companies and government agencies, or ‘fleet’ buyers, represent a significant percentage of overall new vehicle sales in the United States. Yet little is known about fleet demand for new vehicle fuel economy including how it responds to fuel price changes. Using unique disaggregated data on fleet and household registrations of new vehicles from 2009 to 2016, we estimate how fleet demand for new vehicle fuel economy responds to fuel price changes. We find that fleet purchases of low fuel economy vehicles fall relative to high fuel economy vehicles when gasoline prices increase, a finding that is consistent with fleet buyers’ taking into account capitalization of fuel costs in the second‐hand market. Our estimates imply that raising gasoline prices by one dollar would increase fuel economy of new vehicles acquired by fleet buyers by 0.33 miles per gallon. We estimate a similar response for household buyers during the same period. This result justifies basing fuel economy responses to fuel cost changes on household data alone, an assumption widely used in the vehicle demand literature and the fuel economy valuation literature. We also find, however, that the response to fuel price changes varies across the types of fleet buyers: rental companies respond strongly to fuel price changes, whereas commercial and government buyers are insensitive. Our estimates imply that an increase in the federal gasoline tax would modestly increase fuel economy of vehicles bought by households and rental companies but would have little to no impact on fuel economy of vehicles bought by non‐rental companies and governments.

Suggested Citation

Leard, Benjamin and McConnell, Virginia and Zhou, Yichen, The Effect of Fuel Price Changes on Fleet Demand for New Vehicle Fuel Economy (March 2019). The Journal of Industrial Economics, Vol. 67, Issue 1, pp. 127-159, 2019, Available at SSRN: https://ssrn.com/abstract=3609419 or http://dx.doi.org/10.1111/joie.12198

Benjamin Leard (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Virginia McConnell

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

Yichen Zhou

Clemson University, John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

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