Bradley Shrago

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.