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Dynamics of Automobile Demand

Periodic Report Summary 2 - DYNADEM (Dynamics of automobile demand)

The objective of the project was to provide the researcher with an opportunity to interact with top researchers and to hone and upgrade his skills in order to enable him to conduct high quality research. The researcher spent one year at Northwestern University during the outgoing phase of the project (August 2009 - July 2010) and returned to his base at the University of Cyprus for the incoming phase (August 2010 - July 2011).

The researcher's agenda focuses on the analysis of consumer behaviour and in particular on the understanding of dynamic aspects of consumer choice. The literature in this area has made a distinction between durable goods (goods that deliver services over a long period of time, such as automobiles and household appliances) and storable goods (frequently purchased items that are typically sold in supermarkets). During this project, the researcher developed projects related to both types of goods.

The work on durable goods focuses on automobiles and utilises data from several European markets. The central part of the project seeks to exploit the availability of a uniquely detailed dataset of the Cyprus market. Much of the researcher's time was devoted to working with the data and preparing a report that establishes stylised facts and highlights key patterns. The report is expected to be completed and circulated in the next few months. Two research projects were initiated to exploit these data. One project examines the impact of imports of used cars on the quality of the car stock. A second project focuses on household preferences for stocks of cars. These projects are in the early stage and results will be produced in due course.

Two other papers on automobile markets were written during this period. One paper seeks to assess the performance of discrete choice models in estimating mark-ups using auxiliary information that is available in the Cyprus data. The results indicate that even relatively simple models such as the nested logit do well in capturing the mean level of mark-ups, but one needs to estimate a richer random coefficient model in order to obtain an accurate picture of the dispersion of mark-ups. A second paper examines the effectiveness of feebates. Feebates are a combination of taxes and subsidies on automobile purchases that are designed to shift consumer purchases towards more fuel efficient vehicles. The analysis shows that a well-designed feebate scheme can be successful in reducing emissions without burdening government finances or reducing total welfare. The former paper is nearing completion while the latter is complete and will be submitted to a journal very shortly.

The work on storable goods had resulted in two papers, one of which has been submitted for publication while the other is still in progress. The first paper documents a puzzling aspect of consumer behaviour, namely that consumers often fail to exploit arbitrage opportunities caused by temporary price reductions and proposes an explanation in terms of recent theories of rational inattention. The second paper sets out to identify a broad set of stylised facts about sales promotions that can be observed in aggregate, store-level data. It then proposes a simple model that can generate these patterns. The key feature of the model is the existence of two types of consumers; an attentive type that monitors price movements closely and an inattentive type that does not. These types must co-exist in order for the model to be able to replicate observed patterns in the data.

The support provided by that grant allowed the researcher to pursue his research agenda in the area of dynamic consumer choice. It provided him with the opportunity to establish links with new collaborators and to strengthen his own skills. Several papers dealing with different aspects of this problem have been produced or are in the pipeline. This research contributes to our understanding of consumer choice and market outcomes in durable and storable good markets and lays the groundwork for further contributions to knowledge as this research agenda continues to be pursued in the future.