Monday, April 25

Why aren't car sales going down?

When I was writing my previous blog post, I used shoes and shoelaces as an example of complements (in economic theory, when the price of one good goes up, demand for its complement will go down).

As I continued writing, I realized that shoes and shoelaces was a lame example and that perhaps cars and gasoline would be a better example. Unless you've got an electric car or you just want somewhere to sit, a car isn't much use without gasoline. Likewise, unless you're an arsonist, you can't do much with a jug of gasoline if you don't have a car.

What a topical example, I thought. Gas prices have skyrocketed in the last couple months — I'll bet car sales have gone down. People must be taking transit, walking or riding bikes more — or just travelling to fewer places than before. But when I did a search for news articles about this, I found just the opposite. According to the headlines, car sales have been holding steady despite rising gas prices:
Some of the articles seem to suggest that people are trading in gas guzzlers for more fuel-efficient cars, but I am skeptical. First, it sounds like sales are doing well across the board, even if small car sales are doing better. Second, small cars still require gas; even if they require less gas than SUVs, it's still surprising their sales would go up so strongly during such a marked increase in gas prices.

I can think of three alternative explanations for why car sales are up, in order of most plausible to least plausible:
  1. Holding everything else constant, rising gas prices cause car sales to drop. But rising gas prices have coincided with an economic recovery, which, holding everything else constant, causes car sales to rise. The positive effect of the economic recovery is stronger than the negative effect of gas prices.
  2. Long-run gas prices, as opposed to short-run gas prices, influence people's car-buying behaviour. Car sales are strong because people expect gas prices to drop significantly during the lifetime of their car.
  3. Cars are a status symbol — people enjoy them because it signals their wealth to others. If gas prices go up, causing the price of car ownership to rise, it sends an even stronger signal about a driver's wealth, which makes a car more desirable.
Does anyone have other ideas?