SHORT-RUN PRICING STRATEGIES TO INCREASE CORPORATE AVERAGE FUEL ECONOMY

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.