Consumer Valuation of Fuel Economy in the Australian Automobile Market

Abstract

The marginal value that an Australian consumer places on fuel economy isestimated with a hedonic model of prices of new passenger vehicles purchased in 2014.The hedonic model is estimated with 1,802 observations of all sub-models of 105 chosenmodels that represent 25 makes. Few studies have been focused on this valuation in theAustralian market. This study is also unique in that it accounts for three different types offuel, various vehicle types including hybrids, sports utility vehicles, and sports cars, as wellas new technological attributes that enhance a driver’s experience. The estimatedcoefficient for travel cost in the log-linear specification of the hedonic model, indicates thata one-dollar per 100 kilometer decrease in travel cost increases the marginal willingness topay for a new vehicle 1.69 percent, all else equal. The estimated coefficient for travel costimplies that a marginal consumer would be willing to pay, on average, $AUS 1,427 for thesavings in fuel costs from a one liter per 100 kilometer reduction in fuel consumption. Incomparison, the present value of directly estimated savings in fuel costs is$AUS 2,116,given a 1.2 percent discount rate. Thus, the marginal consumer seems to undervalue fueleconomy. The marginal consumer is also willing to pay a 6.45 percent premium for ahybrid vehicle and a 4.84 percent premium for a sports utility vehicle. An owner’s desiresto reduce adverse environmental impacts of a vehicle and acquire status for herenvironmental concerns are motivations that underlie these premia and are separate from adesire to economize on fuel costs