The Demand for and the Supply of Fuel Efficiency in Models of Industrial Organisation

This report organises and discusses empirical estimates of the effects of fuel prices and fuel emissions standards on consumer and firm behaviour. Model-free estimates are only briefly touched upon. The focus is on results based on explicit models, taken mostly from the industrial organisation literature. First, studies are reviewed that identify the willingness to pay for fuel efficiency using static and dynamic models of vehicle demand. Next, the fact that firms will adjust their product portfolios and the characteristics of the vehicles they offer is taken explicitly into account. These decisions will have an impact on the choice set from which consumer demand is estimated and on the trade-off that consumers face between fuel efficiency and other desirable characteristics. Finally, models are discussed where firms choose to invest in innovations to achieve fuel efficiency gains without sacrificing characteristics.