Source: Dissertation Abstracts International, Volume: 71-01, Section: A, page: 0262.

Advisers: Steven T. Berry; Philip A. Haile.

I develop, estimate, and utilize an economic model of the U.S. automobile industry. I do so to address policy questions concerning automotive fuel efficiency (the relationship between gasoline used and distance traveled). Fuel efficiency has played a prominent role in our domestic energy policy for over 30 years. Recently it has received even more attention due to rising gas prices and concern over the environment and energy dependence. The model gives quantitative predictions for market fuel efficiency at various gas prices and taxes. The model makes contributions that are both methodological and policy based, and the two chapters of the dissertation focus on each in turn.

The first chapter discusses the economic model of the U.S. automobile industry. The model allows firms to choose the fuel efficiency of their new vehicles, which allows me to predict fuel efficiency responses to policy and market conditions. These predictions were not possible with previous economic models which held fuel efficiency fixed. In the model, consumers care more about fuel efficiency when gas prices are high, and firms face a technological tradeoff between providing fuel efficiency and other quality. The level of the gas price, therefore, working through consumer demand, shifts firms' optimal locations along this technology frontier. Demand is nested logit, supply is differentiated products oligopoly, and data are from the U.S. automobile market from 1971-2007. In addition to endogenizing product choice, I also contribute to the modeling literature by relaxing restrictive identifying assumptions and obtaining more realistic estimates of fuel efficiency preference. The model predicts sales declines and compositions from the summer of 2008 with reasonable success.

The second chapter discusses two counterfactual policy scenarios: maintained summer 2008 gas prices, and achieving 35 mpg (miles per gallon). At $3.43 per gallon (the summer 2008 price, 23% above 2007), the model predicts equilibrium sales-weighted efficiency of 26.4 mpg (a 17% increase). The model suggests that to achieve average sales-weighted fuel efficiency of 35 mpg (the goal of the new policy proposals) we need after-tax gas prices of $4.55. This is high by U.S. standards, but modest relative to much of the industrialized world.