Fixed and variable cost of automobiles

Recent empirical analyses have found strong reactions of car prices to changes in fuel costs. We develop a model of car quality choice to further investigate this relationship. We show that in the empirically relevant case quality characteristics increase fixed as well as variable costs, and our model focuses on that situation. Quality aspects must then be an argument of the utility function and we introduce them in a general way. In equilibrium the marginal willingness to pay for these aspects must be equal to their margi nal impact on fixed as well as variable costs. We estimate the marginal costs of various quality aspects using an extensive Danish data set. We show that under suitable assumptions the marginal willingness to pay for quality aspects is a structural parameter of the consumer’s preference. We use our results to investigate this structural parameter and study its relationship with household characteristics. Finally, we use our results to compute the change in the willingness to pay for quality characteristics that results from a 1% change in the fuel price.