The Determinants of Demand for Hybrid Cars Shad Ahmed Mark Baldwin Kelly Fogarty Michael Kendra

Overview Objectives Objectives Hypotheses / Variable Examined Hypotheses / Variable Examined Software Software Approach Approach Model Model Variables Variables Statistics Statistics Results Results Policy Implications Policy Implications

Objectives To develop an econometric model and analyze historical data sets to determine which variables explains what factors drive the demand for hybrid vehicles in order to confirm or deny public speculation. To develop an econometric model and analyze historical data sets to determine which variables explains what factors drive the demand for hybrid vehicles in order to confirm or deny public speculation. To maximize the statistical significance of the model in order to provide forecasters with a working model that can be used to make predictions about future demand for hybrid cars. To maximize the statistical significance of the model in order to provide forecasters with a working model that can be used to make predictions about future demand for hybrid cars. To provide the environmentally conscience public, automobile industry, and law makers a foundation upon which to make policy decisions based on objective reasoning. To provide the environmentally conscience public, automobile industry, and law makers a foundation upon which to make policy decisions based on objective reasoning. To provide a solid foundational model upon which future research projects can build on. To provide a solid foundational model upon which future research projects can build on.

Hypotheses H 1 : The demand for hybrid cars is explained by gas prices. H 1 : The demand for hybrid cars is explained by gas prices. H 2 : The demand for hybrid cars is explained by the Producers Price Index for automobiles. H 2 : The demand for hybrid cars is explained by the Producers Price Index for automobiles. H 3 : The demand for hybrid cars is explained by the personal consumption on expenditures for automobiles by the US population H 3 : The demand for hybrid cars is explained by the personal consumption on expenditures for automobiles by the US population

Variables examined Dependent variable: Demand for hybrid vehicles Economic Indicators Economic Indicators –PPI for motor vehicles –Personal consumption on motor vehicles –Bank loan rate –Consumer credit outstanding –Unemployment rate Energy Indicators –Price of gasoline –Barrels of gasoline consumed –Total energy consumption of US population

Variable Identification and Definition VariableTypeHypothesized Sign Demand for Hybrid CarsDep Demand for Hybrid CarsDep PPI for motor vehicles EndNeg PPI for motor vehicles EndNeg Personal consumption on EndPos Personal consumption on EndPos motor vehicles motor vehicles Bank loan rateExoNeg Bank loan rateExoNeg Consumer credit outstandingExoPos Consumer credit outstandingExoPos Unemployment rateExoNeg Unemployment rateExoNeg Price of gasolineEndPos Price of gasolineEndPos Barrels of gasoline consumedEndPos Barrels of gasoline consumedEndPos Total energy consumption of EndPos Total energy consumption of EndPos US population US population

Software WinORSfx was used to develop the model. WinORSfx was used to develop the model. Availability of Economic data from Economagic Availability of Economic data from Economagic Extensive ability to determine statistical significance. Extensive ability to determine statistical significance.

Approach Monthly data sets were used from 2004 – Monthly data sets were used from 2004 – Stepwise regression was run to determine which variables to eliminate from the model. Stepwise regression was run to determine which variables to eliminate from the model. Remaining variables were examined for practicality. Remaining variables were examined for practicality. Ordinary Least Square method was used to test the remaining variables for multicollinearity, homoscedasticity, explainability, and serial correlation. Ordinary Least Square method was used to test the remaining variables for multicollinearity, homoscedasticity, explainability, and serial correlation. First Difference was run to attempt to eliminate serial correlation. First Difference was run to attempt to eliminate serial correlation. A final model was assembled. A final model was assembled.

Determinants Model Qx = *P *P gas +.104C Qx = Demand for hybrid vehicles P = PPI for automobiles P gas = Price of gasoline C = Personal consumption of automobiles

Predictive Ability of Model

F-statistic The P-value is significantly below the critical value, 0.05 The P-value is significantly below the critical value, 0.05 The model is statistically significant above the 95% confidence interval The model is statistically significant above the 95% confidence interval F value: P value:

Coefficient of Determination Demonstrates that a high degree of variability in hybrid sales can be explained by variation in the independent variables Demonstrates that a high degree of variability in hybrid sales can be explained by variation in the independent variables Root MSE Root MSE SSQ(Res) SSQ(Res) Dep.Mean Dep.Mean Coef of Var (CV)22.060% Coef of Var (CV)22.060% Multiple R89.038% Multiple R89.038% R-Squared79.278% R-Squared79.278% Adj R-Squared77.502% Adj R-Squared77.502%

Multicollinearity No evidence of multicollinearity is present in the model (VIF<10) No evidence of multicollinearity is present in the model (VIF<10) Average VIF = 1.037

Parameter VIFs Variable: VIF Price of gasoline1.040 PPI of automobiles1.053 Personal consumption on Automobiles

Constant Variance White’s Test shows that the model is homoskedastistic White’s Test shows that the model is homoskedastistic White’s Test = 8.32 P-Value for White’s =.502

Constant Variance Graph

Auto Correlation Durbin Watson test shows evidence of Auto Correlation Durbin Watson test shows evidence of Auto Correlation Ho: Rho = 0 Ho: Rho = 0 Rho: Pos & NegReject Rho: Pos & NegReject Rho: PositiveDo Not Reject Rho: PositiveDo Not Reject Rho: NegativeReject Rho: NegativeReject First difference solution attempted; resulted in a new R-squared value of.277 First difference solution attempted; resulted in a new R-squared value of.277

Normality of Error Terms

Elasticities Variable Parameter Estimate Price of gasoline2.89 PPI of automobiles8.38 Personal consumption on 3.87 Automobiles

Elasticity Implications Income elasticity Income elasticity –Hybrids are a “luxury” item –Elasticity is >1 –As income increases, Q x increases Cross price elasticity Cross price elasticity –Gasoline and other automobiles are substitutes –Elasticity is >1 –As prices of gasoline and other autos increases, Q x increases