The Price of Gasoline and the Demand for Fuel Economy: Evidence from Monthly New Vehicles Sales Data

This paper uses a unique data set of monthly new vehicle sales by detailed model from 19782007, and implements a new identification strategy to estimate the effect of the price of gasoline on consumer demand for fuel economy. We control for unobserved vehicle and consumer characteristics by using within model-year changes in the price of gasoline and vehicle sales. We find a significant demand response, as nearly half of the decline in market share of U.S. manufacturers from 2002-2007 was due to the increase in the price of gasoline. On the other hand, an increase in the gasoline tax would only modestly affect average fuel economy. * We thank seminar participants at the Harvard John F. Kennedy School of Government, Resources for the Future and UCLA, participants at the International Industrial Organization Conference, the Midwest Economic Association and the Federal Reserve System Committee on Regional Analysis Meeting, as well as two anonymous referees for their very helpful comments. Taft Foster, Vincent Liu and Cristina Miller provided excellent research assistance.