Fuel Price Beliefs and the Consumer Response to Price Fluctuations: The Choice between Gasoline and Diesel Vehicles

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  • March 20, 2019
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  • Shrago, Brad
    • Affiliation: College of Arts and Sciences, Department of Economics
Abstract
  • When consumers make fuel choices in vehicle adoption, they must form beliefs regarding each fuel's price over the life-cycle of the vehicle. Whereas prior research has found that current gasoline prices are a reasonable proxy for consumers' gasoline price beliefs, the same may not hold for the price difference between diesel and gasoline, a key determinant of the savings associated with adopting a diesel engine. I consider the market for gasoline and diesel powered pickup trucks in the state of Washington, where the time-series variation in the diesel premium is transient while geographic variation in the premium is relatively persistent. Because time-series variation in the diesel premium exhibits mean-reversion, a forward-looking individual's price beliefs may not respond to such variation. In order to consider the importance of modeling price beliefs in a manner which allows consumers to exhibit different responses to different types of price variation, I develop a two-period model of truck choice and subsequent usage. I employ a rich dataset of vehicle registrations and high-frequency local fuel prices which allows me to separately identify the consumer response to time-series variation in the diesel premium relative to all other sources of fuel price variation. My estimates suggest the response to the former is roughly one-tenth as strong as the latter. Using a variety of counterfactual simulations, I document that modeling price beliefs in a more flexible manner which allows for different responses to different types of fuel price variation increases common measures of the consumer response to price fluctuations by roughly 15-20\\% in this setting.
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  • In Copyright
Advisor
  • Yates, Andrew
  • Fruehwirth, Jane
  • McManus, Brian
  • Biglaiser, Gary
  • Williams, Jonathan
Degree
  • Doctor of Philosophy
Degree granting institution
  • University of North Carolina at Chapel Hill Graduate School
Graduation year
  • 2017
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