An Empirical Model of Automobile Engine Variant Pricing

Øyvind Thomassen

International Journal of the Economics of Business, 2017, vol. 24, issue 3, 275-293

Abstract: This paper estimates a random-coefficients structural model of the demand for car model engine variants. It uses a new identification approach that assumes the mean unobserved quality is the same for all engine variants within a model. The demand estimates imply that absolute markups increase in horsepower within a car model, while percentage markups are constant or falling in horsepower. The estimated results–as well as simulations of a simple theory model–show that prices are not typically cost-plus-fixed-fee, and absolute markups may increase in quality.

Date: 2017
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DOI: 10.1080/13571516.2017.1333733

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