FUEL EFFICIENCY OF CARS IN THE SINGAPORE MARKET

Abstract

This is a first attempt ever to apply the Hedonic Theory to the local car market. The Hedonic Technique is used to estimate the petrol price elasticity of car attributes and fuel efficiency. An outstanding feature of the technique used in this study is that it resolves the problem of multicollinearity between fuel efficiency and car attributes. This is done by adopting Ohta and Griliches' "two stage" approach. We allow car attributes to enter the utility function directly and fuel efficiency via the budget constraint. The utility function is assumed to be Cobb-Douglas for reason of computational tractability. Moreover, the technique does not require time series data on automobiles. The finding is that the demand for car attributes such as engine size, kerb weight, styling and accelerative ability is generally inelastic. However the signs of the estimates indicate that consumers prefer cars with less accelerative ability and lower kerb weight in the event of an expected petrol price increase. The elasticities for engine size and styling, however, prove to be inconclusive as they are found to be negative in some of the cases and positive in others. Fuel efficiency elasticity estimates show that consumers do demand more fuel efficient cars especially where petrol prices are expected to increase sharply. This information is especially useful to car manufacturers and dealers who may have to adjust products and prices in relation to these changes. Finally, it is hoped that use of the methodology may be extended into other classes of products or even, new areas of work.