Motor fuel choice: An econometric analysis

Concerns about air pollution and energy security have stimulated interest in alternative automotive fuels and in vehicles that can use multiple fuels and combinations of fuels. Consumer behavior in the choice of motor fuel for flexible-fuel vehicles is likely to be a key factor in the creation and stability of markets for new fuels. The sensitivity of fuel choice to fuel prices is investigated here using data on purchases of regular, premium, leaded, and unleaded grades of gasoline. Multinomial logit choice models are estimated for the years 1982, 1983, and 1984. Consumer choices are found to be highly elastic with respect to fuel prices. New fuels will have to be priced within a few cents of existing fuels to capture significant market shares. Consumers also exhibit strong preferences for the fuel type specified by law (unleaded vs. leaded) for their vehicles. Thus, legal restrictions could play an important role in stabilizing alternative fuels markets. The typical consumer is willing to pay 5–10 cents more per gallon for premium grade gasoline. The premium for premium has been increasing as increasing numbers of turbocharged and fuel-injected engines join the fleet, reflecting the fact that consumers are willing to pay more for a fuel if they believe their engines require it.