Motor city blues

Having spent much of my youth in Detroit, the car is king even today. While Motown music made us swoon, the love of cars never died. But for every industry there is a transition.  Fuel economy standards started in the late 1970s and many felt that would kill Detroit. Far from it.  But it is disturbing reading this article by Simon Constable on the Forbes website, that consumers simply don’t care about fuel economy. Is it that they don’t care about the impact on the climate or is it because the car is too ingrained in their habits. Well, let’s see how things evolve when electric cars really take hold.


Detroit’s Headache: Car Buyers Don’t Seem To Care About Fuel Efficiency

Do consumers care about fuel-efficiency when buying cars? Probably not, at least when it comes to their pocketbook.

Car buyers substantially underestimate the savings from reduced fuel costs when making car purchase decisions, according to new research.  As a result, they are willing to pay up far less for the added fuel efficiency than the savings are worth.

These findings present a problem for automobile companies who often face the choice between improving vehicle fuel efficiency and making larger/less efficient models which are more profitable.

Here’s how:

The study, which was distributed by the National Bureau of Economic Research, showed that car consumers woefully discount the future savings from reduced fuel consumption versus a higher price for a new car.

Or as the researchers put it, the finding “suggests substantial undervaluation of fuel economy.”

“For the 2011-2012 model-year vehicles, we find that consumers are indifferent between a $1 increase in discounted future fuel costs and a $0.38 increase in the upfront vehicle purchase price,” states the report titled “Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment.”

In other words, for saving one dollar in the future, the car buyers would only fork over an additional $0.38 now. In practical terms, $1,000 in savings is only worth paying an additional $380 in car price to the average car buyer, the report shows.

The study was conducted by researchers from Yale University, the Wharton School at the University of Pennsylvania and the Centre for Energy Policy and Economics ETH Zurich.

To draw this conclusion, they used data from “all new vehicle transactions in the United States,” from August 2011 through June 2014.

Big problems for Detroit

That consumer behavior is a problem for any automaker trying to sell cars in the U.S.

If car customers don’t place a high enough dollar value on the improved fuel efficiency of the vehicle, then carmakers lack the market-based incentives to increase vehicle miles-per-gallon gasoline consumption. If the car buyer would pay what the additional efficiency was worth, then carmakers would have a more significant incentive to reduce car fuel consumption. But they don’t.

Instead, carmakers have an incentive in precisely the opposite direction.

Already we know that the cost to build smaller (usually more efficient vehicles) is roughly the same as the cost to build larger cars and trucks. But while larger cars might often be less fuel efficient but they are much more lucrative for automakers. In other words, car company executives know they’ll get more profit if they sell bigger cars.

In a decade or two, this problem may not be relevant because battery-powered electric vehicles will likely dominate the roads. But until then they’ll be a headwind for improved fuel efficiency.

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