Consumer Willingness to Pay for Vehicle Attributes: What is the Current State of Knowledge? United States ._.,.,~ EA~ Environmental Protection "' Agency Consumer Willingness to Pay for Vehicle Attributes: What is the Current State of Knowledge? Assessment and Standards Division Offce of Transportation and Air Quality U.S. Environmental Protection Agency Prepared for EPA by RTI International EPA Contract No. EP-C-16-021 Work Assignment No. 1-10 NOTICE This technical report does not necessarily represent fnal EPA decisions or positions. It is intended to present technical analysis of issues using data that are currently available. The purpose in the release of such reports is to facilitate the exchange of technical information and to inform the public of technical developments. EA~United States EPA-420-R-18-016 .....~ Environmental Protection ,., Agency July 2018 ABSTRACT As standards for vehicle greenhouse gas emissions and fuel economy have become more stringent, concerns have arisen that the incorporation of fuel-saving technologies may entail tradeoffs with other vehicle attributes valued by consumers including safety, comfort, and performance. To the extent that such interactions are present, they may influence the rate of consumer acceptance of fuel-saving technologies. Understanding and quantifying such interactions, both positive and negative, is important for transportation policy analyses. Not only will these estimates provide a better understanding of the role of fuel-saving technologies in consumers’ evaluation of new vehicles, and in consumer purchase decisions, but they will also enable a better estimate of policy impacts on overall household welfare. Given the potential importance of accounting for consumer willingness to pay (WTP) for changes in vehicle attributes when conducting policy analyses, we conduct a detailed review and analysis of literature that presents or can be used to calculate WTP for vehicle attributes in order to assess the current state of knowledge in this area. We identified 52 relevant U.S.-focused papers published since 1995 (with one exception) with sufficient data to calculate WTP values. We identify 142 individual characteristics considered in the literature, which we consolidate into the 15 general categories of comfort, fuel availability, fuel costs, fuel type, incentives, model availability, non-fuel operating costs, performance, pollution, prestige, range, reliability, safety, size, and vehicle class. We then calculate WTP values for those characteristics based on the coefficients and data reported in the papers. In addition to central tendency WTP estimates, we present indicators of variability around each WTP value, based either on standard errors of the estimated coefficients or the standard deviations in random coefficient models. We also examine the implications of heterogeneous consumer characteristics (e.g., different levels of income, household size, and other factors). Our findings suggest large variation in WTP values for vehicle characteristics, both within and across studies. This variation may result in part because of methodological difficulties in estimating how attributes affect consumer vehicle choices, such as omitted variables, errors in variables, collinearity, and the use of proxies. We discuss the implications of this variation in WTP estimates for estimating changes in consumer demand due to a change in fuel efficiency technology. Keywords: Consumer preference, fuel efficiency, vehicle demand, willingness to pay JEL Codes: D12, O33, Q52, R40 iii CONTENTS Section Page 1. Introduction 1-1 2. Literature Review 2-1 3. Description of Studies and Attributes Analyzed 3-1 4. Methodology 4-1 4.1 Estimating Central Tendencies of WTP .............................................................. 4-1 4.2 Measuring Preference Heterogeneity and Estimation Uncertainty ..................... 4-5 5. Willingness to Pay for the Attributes of Vehicles 5-1 5.1 Comfort Grouping ............................................................................................... 5-6 5.1.1 Automatic Transmission .......................................................................... 5-6 5.1.2 Rear-wheel Drive vs. Front-wheel Drive ................................................. 5-6 5.1.3 Air Conditioning ...................................................................................... 5-7 5.1.4 Shoulder Room ........................................................................................ 5-8 5.2 Fuel Availability .................................................................................................. 5-9 5.2.1 Recharging Time ...................................................................................... 5-9 5.2.2 Fuel Availability .................................................................................... 5-10 5.3 Fuel Cost ............................................................................................................ 5-10 5.3.1 Reduction in Fuel Cost per Mile ............................................................ 5-10 5.3.2 Dollars per Year ..................................................................................... 5-15 5.3.3 Gallons per Mile .................................................................................... 5-15 5.3.4 Miles per Dollar ..................................................................................... 5-16 5.3.5 Miles per Gallon .................................................................................... 5-16 5.4 Fuel Type ........................................................................................................... 5-17 5.4.1 Electric Vehicles (EVs).......................................................................... 5-17 5.4.2 Hybrid Vehicles ..................................................................................... 5-17 5.4.3 Flexible Fuel .......................................................................................... 5-19 iv 5.4.4 Plug-in Electric Vehicles (PHEVs) ........................................................ 5-20 5.4.5 Methanol ................................................................................................ 5-21 5.4.6 Natural Gas ............................................................................................ 5-21 5.5 Performance ....................................................................................................... 5-22 5.6 Pollution ............................................................................................................. 5-26 5.7 Range ................................................................................................................. 5-26 5.8 Size .................................................................................................................... 5-28 5.8.1 Footprint ................................................................................................. 5-28 5.8.2 Luggage Space ....................................................................................... 5-30 5.8.3 Weight .................................................................................................... 5-31 6. Discussion: Why the Lack of Consensus on WTP? 6-1 7. Concluding Observations 7-1 8. References 8-1 Appendices A: Bibliography of Papers Included in our Main Sample ....................................... A-1 B: Willingness to Pay Results by Attribute Grouping..............................................B-1 C: Discussion of the potential Bias from Estimating WTP from Ratios of Attribute and Price Derivatives ...........................................................................C-1 D: Histograms of Untrimmed Central WTP Estimates by Attribute ....................... D-1 E: Untrimmed Distributions of Central WTP Estimates by Attribute ..................... E-1 F: Author Feedback received and response to comments ........................................ F-1 v LIST OF FIGURES Number Page Figure 3-1. Distribution of Initial Pool of Papers Considered by Year of Publication ......... 3-2 Figure 3-2. Distribution of Papers Considered by Time Period of Data Used...................... 3-6 Figure 3-3. Number of Observations by Attribute Grouping ................................................ 3-7 Figure 5-1. Rear-Wheel Drive Preference Variation, Range is +/- 1 Standard Deviation .................................................................................................................. 5-7 Figure 5-2. Population Taste Heterogeneity for Air Conditioning ....................................... 5-8 Figure 5-3. WTP for a One Hour Reduction in Charge Time Across Studies ...................... 5-9 Figure 5-4. Willingness to Pay for $0.01/mile Decrease in Fuel Cost: All Estimates (2015$) ................................................................................................................ 5-11 Figure 5-5. Willingness to Pay for $0.01/mile Decrease in Fuel Cost: Trimmed Sample (2015$) ........................................................................................................... 5-12 Figure 5-6. Range of Reduction in Fuel Cost per Mile WTP Estimates Describing Preference Heterogeneity ............................................................................................ 5-14 Figure 5-7. Range of Reduction in Fuel Cost per Mile WTP Estimates Describing Estimation Uncertainty ............................................................................................... 5-14 Figure 5-8. Population Taste