- Current approaches for estimating discrete choice models of consumer demand are computationally challenging, making them difficult to use for policy analysis.
- This paper presents a simple method for estimating these models by using increasingly common microdata, such as household demographics.
- The method is applied to simulate the effect of tightening fuel economy standards for cars and light trucks on new vehicle sales.
- The simulation results suggest that a 1-percent increase in the stringency of the standards leads to a modest reduction in new vehicle sales.
Recent literature has shown the importance of modeling consumer demand for assessing the effects of new passenger vehicle fuel economy standards. A relevant feature of demand for making this assessment is how new vehicle buyers substitute between new and used vehicles. In this paper, I derive a new method for estimating this substitution using a discrete choice model. An advantage of the method is its simplicity: preference heterogeneity parameters are estimated with a closed-form expression. I apply the method to estimate parameters of passenger vehicle demand and find that used vehicles are weak substitutes for new vehicles, with the cross-price elasticity of demand between new and used vehicles estimated to be 0.05. I then simulate the sales effects of new vehicle fuel economy standards. The simulation results suggest that a marginal tightening of the standards has modest impact on new and used vehicle sales.