How are Fuel Efficient Cars Priced? Evidence from Eight EU Countries

Do consumers value the fuel economy of cars? In this paper we examine this question, taking advantage of the recent introduction of hybrid and battery-electric vehicles, which promise to reduce the use of fossil fuels in road transport, and hence carbon emissions and dependence on oil imports. The price of these vehicles may however create hurdles to their widespread adoption. Automakers claim that these technologies come with higher production costs. Consumers should be willing to pay a price differential for these cars just equal to the savings in fuel costs—unless their utility depends on considerations beyond car quality, performance and fuel economy.We specifically ask three related questions. First, do consumers value fuel economy, even among all-electric and hybrids? Second, do the prices of electric vehicles reflect the so-called “range anxiety”? Third, is there evidence of an all-electric or hybrid “premium” above and beyond the savings in fuel costs made possible by these cars over their conventional counterparts? We answer these questions using detailed data on new cars sold in eight European Union countries from January 2011 to September 2017, combined with gasoline, diesel and electricity prices and taxation information. Using hedonic pricing regressions and careful sample design, we find that, all else the same, more fuel-efficient variants of the same cars do cost more, but either the fuel economy is undercapitalized, or consumers and automakers are assuming a payback period of 2.5-4.6 years. We also find evidence of large all-electric and plug-in hybrid premiums above and beyond the savings in fuel costs, while regular hybrids cars carry a modest premium—one that is comparable to that of diesel cars or other types of technologies.Individuals who purchase all-electric or plug-in hybrids may be motivated by other considerations in addition to fuel costs, or automakers may be setting prices to take advantage of government incentives. We find no evidence that the prices of all-electric cars reflect their battery range