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Equilibrium Trade in Automobile Markets

Author

Listed:
  • Kenneth Gillingham
  • Fedor Iskhakov
  • Anders Munk-Nielsen
  • John P. Rust
  • Bertel Schjerning
Abstract
We introduce a computationally tractable dynamic equilibrium model of the automobile market where new and used cars of multiple types (e.g. makes/models) are traded by heterogeneous consumers. Prices and quantities are determined endogenously to equate supply and demand for all car types and vintages, along with the ages at which cars are scrapped. The model allows for transactions costs, taxes, flexible specifications of car characteristics, consumer preferences, and heterogeneity. We apply the model to two examples: a revenue-neutral replacement of the new vehicle registration tax with a higher fuel tax and a hypothetical “merger to monopoly” in an oligopolistic new car market. We show substantial gains in consumer welfare from the tax policy change, as well as important effects on government revenues, automobile prices, driving, fuel consumption and CO₂ emissions, while the merger leads to substantial welfare losses.

Suggested Citation

  • Kenneth Gillingham & Fedor Iskhakov & Anders Munk-Nielsen & John P. Rust & Bertel Schjerning, 2019. "Equilibrium Trade in Automobile Markets," NBER Working Papers 25840, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25840
    Note: EEE IO
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    References listed on IDEAS

    as
    1. Alessandro Gavazza & Alessandro Lizzeri & Nikita Roketskiy, 2014. "A Quantitative Analysis of the Used-Car Market," American Economic Review, American Economic Association, vol. 104(11), pages 3668-3700, November.
    2. Fedor Iskhakov & John Rust & Bertel Schjerning, 2016. "Recursive Lexicographical Search: Finding All Markov Perfect Equilibria of Finite State Directional Dynamic Games," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(2), pages 658-703.
    3. Konishi, Hideo & Sandfort, Michael T., 2002. "Existence of stationary equilibrium in the markets for new and used durable goods," Journal of Economic Dynamics and Control, Elsevier, vol. 26(6), pages 1029-1052, June.
    4. James Berkovec, 1985. "New Car Sales and Used Car Stocks: A Model of the Automobile Market," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 195-214, Summer.
    5. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    6. Ronald L. Goettler & Brett R. Gordon, 2011. "Does AMD Spur Intel to Innovate More?," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1141-1200.
    7. Jerome Adda & Russell Cooper, 2000. "Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 778-806, August.
    8. Susanna Esteban & Matthew Shum, 2007. "Durable-goods oligopoly with secondary markets: the case of automobiles," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 332-354, June.
    9. Gillingham, Kenneth & Munk-Nielsen, Anders, 2019. "A tale of two tails: Commuting and the fuel price response in driving," Journal of Urban Economics, Elsevier, vol. 109(C), pages 27-40.
    10. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    11. Dmitriy Stolyarov, 2002. "Turnover of Used Durables in a Stationary Equilibrium: Are Older Goods Traded More?," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1390-1413, December.
    12. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    13. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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    Cited by:

    1. Patrick Bigler & Doina Maria Radulescu, 2022. "Environmental, Redistributive and Revenue Effects of Policies Promoting Fuel Efficient and Electric Vehicles," CESifo Working Paper Series 9645, CESifo.
    2. Randall Wigle, 2019. "The Economic Case for EV Supports? Or: Network Effects, EV Pessimism and EV Supports," LCERPA Working Papers ec0123, Laurier Centre for Economic Research and Policy Analysis, revised 23 Oct 2019.
    3. Takeshi Fukasawa, 2022. "Firm's Static Behavior under Dynamic Demand," Discussion Paper Series DP2022-19, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2022.

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    More about this item

    JEL classification:

    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • L98 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Government Policy
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics

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