Effects of Fuel Prices on Proportions of Diesels in Passenger Cars

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School of Business | Master's thesis
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Degree programme
Information and Service Management (ISM)
A car is a relatively expensive and long-term purchase for a consumer. Its operating costs can be expected to play a significant role in purchase decisions. Prices of gasoline and diesel fuels vary over time, and this makes diesel powered vehicles relatively more or less cost-efficient to operate depending on the price situation of fuels. In this thesis, it is investigated if a long run level relationship exists between consumer prices of gasoline and diesel, and proportions of diesels in three popular car models registered in Finland between 2005 and 2015. Also, the existing literature on car choice is reviewed to justify the expectation of such a relationship, and to identify any prior evidence of it. Existing models of car choice are commonly based on random utility theory, and employ discrete choice models in describing and predicting consumers’ car choices among a discrete set of alternatives. While operating costs are commonly included in car choice models, fuel prices themselves are more seldom considered. However, changing fuel prices may make a diesel model more cost-efficient to run if diesel is relatively cheap, which would theoretically lead to a bigger diesel share of cars purchased, assuming the decision maker acts rationally. An Autoregressive Distributed Lag with Bounds Testing method is used in this thesis to investigate if a long run level relationship between prices of gasoline and diesel, and diesel shares in three popular cars exists. The method is preferable to the type of setting in this thesis, where the time series may be stationary, non-stationary or cointegrated in the same equation. The car models chosen into the analysis are VW Golf, Toyota Avensis and Skoda Octavia, because these have been among the most popular cars during the focus period, and therefore a sufficient amount of data exists. It is found that in two out of three cars analyzed, the long run level relationship between fuel prices and diesel shares exists. Further, the direction of the effect is intuitively sound; higher gasoline price is associated with higher proportion of diesels in cars registered. The study finds moderate support for the theoretical expectation that fuel prices have a small but detectable effect on diesel shares of new cars.
Thesis advisor
Kuosmanen, Timo
Seppälä, Tomi
car choice models, random utility theory, discrete choice models, fuel types, fuel prices, autoregressive distributed lag models with bounds testing
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