Job market paper

Fuel Price Beliefs and Consumers' Responses to Price Fluctuations: The Choice between Gasoline and Diesel Vehicles

When consumers make fuel choices in vehicle adoption, they must form beliefs regarding each fuel's price over the life-cycle of the vehicle. I consider the market for gasoline and diesel powered pickup trucks in the state of Washington, where the price differential between gasoline and diesel fuel exhibits mean-reversion. I estimate a two-period model of truck choice and subsequent usage using a rich dataset of vehicle registrations and high-frequency local fuel prices. Owing to the nature of fuel distribution networks in Washington, my data contain high levels of cross-sectional variation in fuel prices within the state. This allows me to separately identify consumers' responsiveness to different types of fuel price variation. Within the confines of my structural model, I estimate that a $0.17 increase in the persistent component of fuel prices has the same effect on price beliefs as a $1.00 increase in the mean-reverting component of fuel prices. I document that decomposing fuel prices in the presence of mean-reverting price variation modestly increases consumers' estimated responsiveness to fuel price fluctuations.

Fields

Applied microeconomics (primary), Industrial organization, Environmental and energy economics, Network economics, Consumer search and price dispersion, Economics of education