The cost of fuel economy in the Indian passenger vehicle market

To investigate how fuel economy is valued in the Indian car market, we compute the cost to Indian consumers of purchasing a more fuel-efficient vehicle and compare it to the benefit of lower fuel costs over the life of the vehicle. We estimate hedonic price functions for four market segments (petrol hatchbacks, diesel hatchbacks, petrol sedans, and diesel sedans) to compute 95% confidence intervals for the marginal cost to the consumer for an increase in fuel economy. We find that the associated present value of fuel savings falls within the 95% confidence interval for most specifications, in all market segments, for the years 2002 through 2006. Thus, we fail to consistently reject the hypothesis that consumers appropriately value fuel economy.

► We examine the tradeoffs faced by new vehicle consumers in India. ► We use hedonic price functions and instrumental variables. ► We find no support for the hypothesis that consumers undervalue fuel economy. ► Some consumers are willing to forgo substantial potential savings to own their preferred vehicle.