The Price of Gasoline and the Demand for Fuel Efficiency: Evidence from Monthly New Vehicles Sales Data

This paper uses a unique data set of monthly new vehicle sales by detailed model from 19702007, and implements a new identification strategy to estimate the effect of gasoline prices on new vehicle demand. We control for unobserved vehicle and consumer characteristics by using within model-year changes in gasoline prices and vehicle sales. We find a significant demand response, as nearly half of the decline in market share of U.S. manufacturers from 2002-2007 was due to the increase in gasoline prices. On the other hand, a gasoline tax increase would have a modest effect on average fuel efficiency. * We thank participants at the UCLA Environmental Economics Workshop, the International Industrial Organization Conference, the Midwest Economic Association and the Federal Reserve System Committee on Regional Analysis Meeting. Taft Foster, Vincent Liu and Cristina Miller provided excellent research assistance.