The Link Between Gasoline Prices and Vehicle Sales
Economic Theory Trumps Conventional Detroit Wisdom
By Walter McManus
Walter McManus is the Director of the University of Michigan Transportation Research Institute (UMTRI) Automotive Analysis Division. His research applies econometrics, competitive analysis, consumer demand theory, and forecasting to understand trends in the automotive industry. His business career includes nine years at General Motors in various assignments in economics, marketing, and product development and five years as executive director of forecasting for J.D. Power and Associates, in which he developed models for forecasting sales and conducted research on new automotive technologies. He is a member of NABE, the Society of Automotive Engineers, the American Economic Association, and the Society of Automotive Analysts. He earned a B.A. from Louisiana State University in 1977 and a Ph.D. in 1983 from UCLA, where he was a Sidney Stern Fellow.
This paper examines the link between fuel prices and sales of cars and trucks. U.S. automakers have long denied that such a link exists. One source of this false belief is an obsession with the crude count of units sold, equating Hummers with Minis. Another source is the conventional “wisdom” that Americans are unwilling to pay for fuel economy. The paper presents theoretical reasons and market evidence that refute Detroit’s conventional wisdom. American manufacturers’ reaction to rising fuel prices over the last few years revealed the shortcomings of the U.S. automakers’ recent product and powertrain strategies. The effect of rising fuel prices has, in effect, been offset by reducing prices of vehicles in inverse proportion to fuel economy. Thus, unit sales of large SUVs could be maintained, but their revenue (and profit) fell because vehicle prices were cut, directly or indirectly. The paper concludes with a few practical guidelines that business economists should use to prevent their companies from experiencing the recent massive losses experienced by the U.S. automobile industry.
By Walter McManus