U.S. LAW REQUIRES CARS PRODUCED BY EACH MANUFACTURER TO COMPLY WITH AVERAGE STANDARDS OF FUEL ECONOMY. THIS PAPER EXAMINES THE EFFECTS OF THEIR FUEL ECONOMY STANDARDS ON NEW AUTOMOBILE PRICES IN THE 1978, 1979 AND 1980 MODEL YEARS. PRODUCERS FACED TWO OPTIONS IN MEETING THE STANDARDS; (1) MAINTAIN THE SAME MODEL LINE, BUT ADJUST RELATIVE PRICES SO AS TO SELL A HIGHER PROPORTION OF THEIR MORE FUEL-EFFICIENT MODELS, OR (2) MAINTAIN THE SAME PRICING STRATEGY, BUT ADJUST MODEL LINE SO AS TO RAISE THE AVERAGE FUEL EFFICIENCY OF THE MODELS SOLD. A COMBINATION OF BOTH OPTIONS COULD ALSO BE USED. THIS PAPER SEEKS TO DETERMINE HOW FAR THE FORMER OPTION (RELATIVE PRICE ADJUSTMENT) WAS USED BY THE FOUR LARGEST U.S. AUTOMOBILE PRODUCERS. A SIMPLE REPRESENTATION OF THE LIKELY EFFECTS OF THE MILEAGE STANDARD ON RELATIVE AUTOMOBILE PRICES FOR GIVEN MODEL CHARACTERISTICS IS DEVELOPED. THESE PREDICTIONS ARE THEN USED TO TEST THE EXTENT TO WHICH EACH OF THE 4 LARGEST U.S. AUTOMOBILE PRODUCERS CHANGED ITS PRICING STRATEGY TO MEET THE STANDARD. THE TESTS SUGGEST THAT THE MANDATORY FUEL ECONOMY REQUIREMENTS DID AFFECT PRICING POLICIES IN 1978 AND 1979, BUT BY 1980 THESE EFFECTS WERE NO LONGER SIGNIFICANT.
Abstract