SHORT‐RUN PRICING STRATEGIES TO INCREASE CORPORATE AVERAGE FUEL ECONOMY

Abstract

Since 1974 the average fuel economy of new cars has doubled from fourteen to twenty‐eight miles per gallon. Shifts in sales to more fuel efficient models within a product line accounted for little of the improvement. This paper explores the use of pricing strategies to shift sales to achieve a legislated fuel economy target. A multinomial logit model is used to compute surcharges and rebates that leave consumer satisfaction unchanged yet increase the sales‐weighted average fuel economy. The results suggest pricing strategies are efficient for small improvements in fuel economy, but are expensive for large improvements.