The purpose of this project is develop a methodology for empirically analyzing differentiated product industries, and apply it to study the changes that have occurred in the U.S. automobile industry over the last two decades. The general methodology has wide applicability, but the specifics of the model are tailored to auto industry application. Therefore, the project will have both a methodological and empirical output. The empirical goals are twofold: to come to a broad understanding of the changes that have occurred in the U.S. auto market during the last twenty years, and to provide an evaluation of public policies that have been suggested for this industry. Of particular interest is the impact of enviromnental regulation in the form of a carbon tax on the auto industry. This project involves developing an estimable static model of differentiated product markets. The key elements of the model are consumer preferences for the characteristics of marketed products, the cost functions of firms, and a market equilibrium assumption. The research focuses on three methodological concerns: to develop a tractable model of consumer behavior that allows for reasonable substitution patterns, to incorporate the presence of product characteristics which are unobserved by the researcher, and to account for the process by which firms choose the characteristics of new products. The resulting model will be used to analyze a series of important public concerns in the automobile industry including policies that aim to increase fuel efficiency, to regulate international trade, and to implement anti-trust laws. Because the model starts at the detailed micro level, it can provide results not only on the implications of these policies for prices and quantities, but also for the distribution of consumer welfare among income groups and the distribution of profits among producers.
