The Demand for New Automobiles in the United States 1929-1956

Abstract

IN this paper we present the results of a new study of the demand for passenger automobiles, embodying a number of improvements over the attempts of previous investigators. In particular: (a) some account is taken of the influence of credit conditions on demand; (b) the dynamics of the market derive primarily from the accumulation of a stock of cars rather than from the rate of change of income; (c) the statistical work is carried out in terms of first differences to facilitate testing the influence of the variables. In the final formulation of the demand function, annual retail sales of new passenger automobiles are explained by: (i) real disposable income; (2) the stock of passenger cars on the road, January I; and (3) the average real retail price of new passenger automobiles divided by the average number of months' duration of automobile credit contracts. The price variable is, thus, an index of the monthly payment associated with the purchase of passenger automobiles. Use of this variable involved an estimate of a retail price index and of the number of months' duration of credit contracts. The source and nature of these estimates is taken up in the Appendix. Finally (4), we use a dummy shift variable to account for the special conditions of the automobile market in years of severe production shortage. The demand was estimated by least-squares linear regression with the variables expressed in first differences. For purposes of summary, the results are expressed in Table i as elasticities computed by reference to mean values. The statistical demand schedule fits the observed behavior of the market very well. When the equation is expressed in first differences, the coefficient of multiple correlation is .93. When calculated changes are added to sales of the preceding year, the correlation between actual and predicted levels is .98. It is particularly notable that the sensational rise in demand in

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