The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom

This paper examines the link between fuel prices and sales of cars and trucks. U.S. automakers have long denied that such a link exists. One source of this false belief is an obsession with the crude count of units sold, equating Hummers with Minis. Another source is the conventional “wisdom” that Americans are unwilling to pay for fuel economy. The paper presents theoretical reasons and market evidence that refute Detroit’s conventional wisdom. American manufacturers’ reaction to rising fuel prices over the last few years revealed the shortcomings of the U.S. automakers’ recent product and powertrain strategies. The effect of rising fuel prices has, in effect, been offset by reducing prices of vehicles in inverse proportion to fuel economy. Thus, unit sales of large SUVs could be maintained, but their revenue (and profit) fell because vehicle prices were cut, directly or indirectly. The paper concludes with a few practical guidelines that business economists should use to prevent their companies from experiencing the recent massive losses experienced by the U.S. automobile industry.automotive industry; fuel prices; vehicle sales; American automakers

The Effects of Higher Gasoline Prices on U.S. Light Vehicle Sales, Prices, and Variable Profit by Segment and Manufacturer Group, 2001 and 2004

The rising gasoline prices of the past few years were not associated with shifts from vehicles with lower MPG to vehicles with higher MPG. This has been seen as evidence that gasoline prices have little impact on the purchase choices of new-vehicle buyers. However, this paper presents new evidence that the shifts toward vehicles with higher MPG that the rising price of gasoline would have caused were not observed because they were offset by price cuts that were disproportionately applied to vehicles with lower MPG.fuel economy; gasoline prices; automobile demand; nested multinomial logit; variable profit

Fixing Detroit: how far, how fast, how fuel-efficient

The Automotive Industry Crisis of 2009 is the worst the industry has ever experienced. This paper helps resolve the debate on how much and fast it should change and how it should it respond to demands for increased fuel efficiency. Looking at the actions of successful corporate turnarounds, the lessons are very clear: implement broad, deep, fast change, replace the management team, and transform the culture. We modeled the impacts of different fuel economy standards on profitability and sales, using the most accepted estimates of all the key parameters, and conducted an extensive sensitivity analysis on the key parameters. The impact of higher fuel economy standards on industry profits is very clear: increasing fuel economy 30% to 50% (35 mpg to 40.5 mpg) would increase the Detroit 3’s gross profits by roughly $3 billion per year, and increase sales by the equivalent of two large assembly plants. The sensitivity analysis showed our findings are very robust. The overall risk and reward profile is very positive, with only a small chance of losing and a very large probability of gain.Automotive Industry Crisis of 2009; business culture change; consumer demand; consumer value of fuel economy; costs of improving fuel economy; Detroit Three; direct cost of improving fuel economy; fuel economy standards; indirect costs; management; product portfolio; profits; scenarios; sensitivity analysis; turnaround

Can proactive fuel economy strategies help automakers mitigate fuel price risk?

Detroit automakers have opposed mandated improvements in fuel economy since legislation was first proposed in the 1970’s. Their opposition is based, among other considerations, on the assumption that their customers value fuel economy only when fuel prices are high. This paper presents the findings of our on-going research that strongly refutes this assumption. Using data on sales, prices, and attributes of vehicles in 2005, we find that consumers are willing to pay, on average, $578 per MPG for higher fuel economy. At the price of gasoline prevailing in 2005,$2.30 per gallon, the $578 per MPG that consumers are willing to pay for fuel economy implies that consumers put more weight in choosing vehicles on future fuel savings than most analysts (including ourselves) had thought. The paper incorporates these new data-driven estimates of the value of fuel economy into an automotive market simulation model that has three components: a consumer demand function that predicts consumers’ vehicle choices as functions of vehicle price, fuel price, and vehicle attributes (the new estimates of the value of fuel economy are used to set the parameters of the demand function); an engineering and economic evaluation of feasible fuel economy improvements by 2010; and a game theoretic analysis of manufacturers’ competitive interactions. Using our model, we estimated the market shares and profits of automakers in 128 separate scenarios defined by alternative plausible values for the price of fuel and consumers’ discount rates. Under the fuel price risks and the competitive risks that automakers face, our analysis concludes that a proactive strategy of pursuing fuel economy improvements— above and beyond what is required by law—would increase annual profits for Ford ($0.5 billion to $1.4 billion), GM ($0.2 billion to $0.5 billion, and DaimlerChrysler ($0.1 billion). Even if the uncertainty over fuel price were removed, all three automakers would increase profits by pursuing fuel economy improvements, though the gains are smaller with fuel at $2.00/gallon.automotive industry; automakers; fuel econnomy; willingness to pay; game theory; consumer demand for fuel economy; Corporate Average Fuel Economy

Economic analysis of feebates to reduce greenhouse gas emissions from light vehicles for California

A growing majority of climate scientists are convinced that unless emissions are reduced, global warming would cause a number of adverse effects throughout the United States. In California, rising temperatures would reduce the snow pack in the Sierra-the state's primary source of water-and lead to less water for irrigating farms in the Central Valley. Global warming would increase the number of extreme heat days and greatly increase the risk of poor air quality across the state. California's 1,100 miles of coastline and coastal communities are vulnerable to rising sea levels. Concerted action could curb global warming, but all sectors would need to take immediate steps to reduce heattrapping pollution. In California, the transportation sector consumes well over half the oil used statewide, and passenger cars and trucks emit 20 to 30 percent of the state's global warming pollution. Vehicles therefore are a central focus of the immediate action required to reduce global warming. The state of California's regulatory approach involves phasing in limits to average global warming emissions from passenger cars and trucks beginning in 2009 and culminating in 2016. This regulation is often called "Pavley," after its author, Assemblywoman Fran Pavley. The federal government's approach provides tax incentives to buyers of hybrid vehicles, which emit significantly lower amounts of global warming pollution than most conventional vehicles. However, the hybrid incentive affects only a small portion of the vehicle market. A third approach that could be used to enhance or replace existing regulations would be a feebates program. A feebates program creates a schedule of both fees and rebates that reflects the amount of global warming pollution that different vehicles emit. Purchasers of new vehicles that emit larger amounts of heat-trapping emissions pay a one-time surcharge at the point of purchase. These surcharges are then used to provide rebates to buyers of new vehicles that emit less pollution. A feebates program has several advantages over other approaches: Market-oriented: A feebates program recognizes the power of price signals to change consumer behavior. That is, incentives spur consumers to purchase and manufactures to produce cleaner vehicles. Self-financing: A feebates program can be designed so that the surcharges collected equal the rebates paid. Affects entire market: A feebates program applies to all new vehicles-clean and dirty-spurring a transformation of the entire market. Consumer choice: A feebates program can be designed so that consumers have the option to buy vehicles that carry no surcharge in each vehicle class, such as cars, trucks, sport utility vehicles (SUVs), and minivans. This study explores the economic impacts on consumers and manufacturers of the existing Pavley regulation and a feebates program by analyzing four alternative scenarios, using information from 2002 as the base year. Our findings show that a feebates program is an effective strategy to reduce global warming pollution by up to 25% more than Pavley alone. Also, under a feebates program consumers will save thousands of dollars and retailers will see their revenue rise by as much as 6%.automotive industry; feebates; greenhouse gases; vehicle emissions; public policy

High efficiency trucks: new revenues, new jobs, and improved fuel economy in the medium and heavy truck fleet

The move to high efficiency trucks can lead to new revenues and jobs for companies involved in the development and marketing of the technologies needed to make this transition. But in order for the medium and heavy truck industry to make this transition, there will be a number of barriers to overcome. This study, funded by CALSTART, examines these challenges, estimates the potential revenues and jobs that may be created, and discusses the policy options available to government. The basis for this analysis is a survey of the manufacturers and suppliers that make up the medium/heavy truck industry. We divided potential new technologies into three groups, aerodynamics, hybrid/electric, and other powertrain technologies supplied from a previous analysis by the Union of Concerned Scientists (UCS). There are significant differences in the cost and sophistication of the technologies within as well as among these groups. Our analysis is based on the responses of 31 companies (from an original 90) that are either marketing or developing 52 of the new technologies. Two of the three challenges to introducing these new technologies, as reported by the executives who participated in the survey, focus on building the business case for the trucking industry to introduce the new technologies and ensuring customer acceptance of the technologies. The other major challenge is the technology challenges that still exist for some of the new technologies. These are significant challenges because the medium/heavy trucking industry, which runs on narrow margins, makes technology decisions based not on emotion but on business economics.CALSTARThttp://deepblue.lib.umich.edu/bitstream/2027.42/91261/1/102867.pd

The link between gasoline prices and vehicle sales:economic theory trumps conventional Detroit wisdom

This paper examines the link between fuel prices and sales of cars and trucks. U.S. automakers have long denied that such a link exists. One source of this false belief is an obsession with the crude count of units sold, equating Hummers with Minis. Another source is the conventional “wisdom” that Americans are unwilling to pay for fuel economy. The paper presents theoretical reasons and market evidence that refute Detroit’s conventional wisdom. American manufacturers’ reaction to rising fuel prices over the last few years revealed the shortcomings of the U.S. automakers’ recent product and powertrain strategies. The effect of rising fuel prices has, in effect, been offset by reducing prices of vehicles in inverse proportion to fuel economy. Thus, unit sales of large SUVs could be maintained, but their revenue (and profit) fell because vehicle prices were cut, directly or indirectly. The paper concludes with a few practical guidelines that business economists should use to prevent their companies from experiencing the recent massive losses experienced by the U.S. automobile industry

Perceived Stigma of Sudden Bereavement as a Risk Factor for Suicidal Thoughts and Suicide Attempt: Analysis of British Cross-Sectional Survey Data on 3387 Young Bereaved Adults

The sudden death of a friend or relative, particularly by suicide, is a risk factor for suicide. People who experience sudden bereavement report feeling highly stigmatised by the loss, potentially influencing access to support. We assessed whether perceived stigma following sudden bereavement is associated with suicidal thoughts and suicide attempt. We analysed cross-sectional survey data on 3387 young adults bereaved by the sudden death of a close contact. We tested the association of high versus low perceived stigma (on the stigma sub-scale of the Grief Experience Questionnaire) with post-bereavement suicidal ideation and suicide attempt, using random effects logistic regression, adjusting for socio-demographic factors, pre-bereavement psychopathology, and mode of sudden bereavement (natural causes/unnatural causes/suicide). Subjects with high perceived stigma scores were significantly more likely to report post-bereavement suicidal thoughts (adjusted odds ratio (AOR) = 2.74; 95% confidence interval (CI) = 1.93-3.89) and suicide attempt (AOR = 2.73; 95% CI = 2.33-3.18) than those with low stigma scores. People who feel highly stigmatised by a sudden bereavement are at increased risk of suicidal thoughts and suicide attempt, even taking into account prior suicidal behaviour. General practitioners, bereavement counsellors, and others who support people bereaved suddenly, should consider inquiring about perceived stigma, mental wellbeing, and suicidal thoughts, and directing them to appropriate sources of support