TAILIEUCHUNG - Pain at the Pump: How Gasoline Prices Aect Automobile Purchasing in New and Used Markets 

Imagine. It’s 6:25 . and you’ve just wrapped up a meeting. You still have several items on your “must-do” list before you can call it a night and a 25-minute commute that used to take as long as 90 minutes in the bad old days of rush-hour traffic. But no worries today. You flick open an app on your phone and request a pick-up at the office; a text confirmation comes back and a few minutes later a car pulls up. “Home,” you say, as you launch a call to your client in Shanghai. The car slips easily into the. | Pain at the Pump How Gasoline Prices Affect Automobile Purchasing in New and Used Markets Meghan R. Busse Northwestern University and NBER Christopher R. Knittel University of California Davis and NBER Florian Zettelmeyer Northwestern University and NBER February 2009 First version October 2008 We are grateful for helpful comments from Severin Borenstein Igal Hendel Ryan Kellogg Jorge Silva-Risso Scott Stern and seminar participants at the ASSA Iowa State Ohio State UC Berkeley and Yale. We thank the University of California Energy Institute UCEI for financial help in acquiring data. Busse and Zettelmeyer gratefully acknowledge the support of NSF grants SES-0550508 and SES-0550911. Knittel thanks the Institute of Transportation Studies at UC Davis for support. Addresses for correspondence E-mail m-busse@ crknittel@ f-zettelmeyer@ Pain at the Pump How Gasoline Prices Affect Automobile Purchasing in New and Used Markets Abstract In this paper we investigate how gasoline prices affect equilibrium prices and market shares for cars of different fuel efficiencies in both the new and used car markets. We find that in general when gasoline prices increase prices fall and market shares decrease for fuel-inefficent cars and the reverse for fuel-efficient cars. However the relative magnitudes of these effects differ dramatically between the new and used car 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 explore reasons for these differences between the markets. 1 Introduction Over the past several years the automobile industry has been in a period of dramatic turbulence. There have been large movements in gasoline prices taking retail prices to their highest real values ever Energy Information Administration Short Term Energy Outlook January 2007 . The Ford F150 pickup fell from its longstanding position as the highest .

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