Pain at the Pump: How Gasoline Prices Affect Automobile Purchasing∗

In this paper we make use of detailed, transaction-level data on automobile purchases and monthly, ZIP-code level data on retail gasoline prices to investigate the effect of fuel prices on four aspects of automobile purchasing in the U.S.: market shares, new car prices, trade-in utilization, and new car inventories. We find statistically and economically significant effects in all four aspects, all of which point to consumers being responsive to gasoline prices in their car choices. Among our results, we find that gasoline price increases lead to overall increased market share for fuel efficient cars and decreased market share for fuel inefficient cars, but that there are also significant market share shifts within car segments. We find that transactions prices of fuel efficient cars rise when gas prices increase, while prices of fuel inefficient cars fall. We find that customers buy more fuel efficient new cars relative to their trade in cars when gas prices increase, and that the trade-in of fuel inefficient cars is accelerated when gasoline prices increase, while the trade-in of fuel efficient cars is delayed. Finally, we find substantial effects on inventories: fuel inefficient cars sit on dealer lots longer when gasoline prices rise, while fuel efficient cars are sold more quickly.