October 30, 2009

Do Consumers and Firms Care about Gasoline Prices?


Dr. Christopher Knittel, Associate Professor of Economics, Chancellor's Fellow, UC Davis


The dramatic increase in gasoline prices from close to $1 in 1999 to $4 during the peak in 2008 has 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 consider new and used car markets. We find that a $1 increase in gasoline price changes the market shares of the least and most fuel efficient quartiles of new cars by +25% and -22%, respectively. In contrast, the same gasoline price increase changes the market shares of the least and most fuel efficient quartiles of used cars by only +4% 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 $382 for a $1 increase in gas prices; for used cars it is $2723. 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 cost affect new and used automobile markets can be entirely explained by differences in the supply conditions of new and used cars.

Biographical Sketch

Christopher Knittel joined the faculty at UC Davis in 2002, having taught previously at Boston University from 1999 to 2002. In 2008, Professor Knittel was one of five faculty members at UC Davis named as a Chancellor’s Fellow. Professor Knittel received his B.A. in economics and political science from the California State University, Stanislaus in 1994 (summa cum laude), an M.A. in economics from UC Davis in 1996, and a Ph.D. in economics from UC Berkeley in 1999. His research focuses on industrial organization, environmental economics, and applied econometrics. He is a Research Associate at the National Bureau of Economic Research in the Productivity, Industrial Organization and Energy and Environmental Economics groups, a visiting Research Associate at the University of California Energy Institute, a faculty associate of the Institute of Transportation at UC Davis, and a member of the California Air Resource Board’s Economic and Allocation Advisory Committee for AB 32. Professor Knittel is an associate editor of The American Economic Journal — Economic Policy, The Journal of Industrial Economics and Journal of Energy Markets. His research has appeared inĀ  The American Economic Review, The American Economic Journal, The Review of Economics and Statistics, The Journal of Industrial Economics, The Energy Journal and other academic journals.