New Car Sales and Used Car Stocks: A Model of the Automobile Market

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New Car Sales and Used Car Stocks: A Model of the Automobile Market Author(s): James Berkovec Reviewed work(s): Source: The RAND Journal of Economics, Vol. 16, No. 2 (Summer, 1985), pp. 195-214 Published by: Wiley on behalf of RAND Corporation Stable URL: http://www.jstor.org/stable/2555410 . Accessed: 06/02/2013 23:51 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

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Rand Journal of Economics Vol. 16, No. 2, Summer 1985

New car sales and used car stocks: a model of the automobilemarket James Berkovec*

This article develops a short-run general equilibrium model of the automobile market by combining a discrete choice model of consumer automobile demand with simple models of new automobile production and used vehicle scrappage. The theoretical model allows an unlimited degree of heterogeneity of both consumers and automobiles, with equilibrium defined as aggregate demand equal to supplyfor every vehicle type. Econometric estimates of the scrappage and demand functions are then used to create a simulation model of the automobile market, which is used to provideforecasts of automobile sales, stocks, and scrappage for the 1978-1990 period. 1. Introduction * Automobile market behavior is of significant interest because of the substantial impacts of automobile production and use on a variety of public policy concerns including trade flows, business cycles, energy demand, and air pollution. Consequently, many government regulatory programs have attempted to alter automobile sales and use patterns. Although recent public attention has been focused on governmental attempts to increase sales of domestic vehicles via "voluntary" export restrictions, the government has been an active participant in the automobile market through direct product quality regulation for many years. During the past quarter century, the federal government has intervened in the automobile marketto correctperceived market failuresthrough a variety of regulationsdesigned to increase vehicle safety while reducing air pollution and energy consumption. These regulatory policies alter some characteristicsof newly produced vehicles (e.g., miles per gallon), thereby gradually achieving their objective (improved fuel efficiency) as old vehicles are retired and replaced by new ones. Frequently these regulations appear to conflict, with safer and cleaner cars being less energy efficient. All of these policies work in similar ways on the automobile market in that they modify the attributes (including prices) of the new vehicles available to consumers, thereby leading to different consumer purchases of new vehicles. The complexity of the automobile market makes it difficult to evaluate the effects of these policies, especially in the short run. Automobiles are highly differentiated durable goods with variable lifetimes. If an "improvement" (e.g., fuel efficiency) is mandated in the offeringsof new cars at a sufficiently high cost, it will induce a demand shift away from new * University of Virginia. This article is based on my Ph.D. dissertation at MIT. I am grateful to Tim Kehoe and Dan McFadden for their guidance. I would also like to thank Al Klevorick, Chuck Manski, John Rust, and two anonymous referees for their many valuable comments.

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