Prices Matter

On September 12 last year, I linked an article in the Arizona Republic that I declared to be ridiculous wishful thinking on the part of the author, completely disconnected from how people have responded to price changes in the past:

The worst oil shock since the 1970s has put a permanent mark on the American way of life that even a drop in oil's price below $100 a barrel won't erase.

Public transportation is in. Hummers are out. Frugality is in. Wastefulness is out....

As prices come falling back to earth, Americans aren't expected to drop their newfound frugality. The jarring reality of $4-a-gallon gasoline stirred up an unprecedented level of consumer angst that experts say will keep people from reverting to extravagant energy use for years to come - if ever again....

"I see a permanent shift," said Kit Yarrow, a consumer psychologist at San Francisco's Golden Gate University who has studied how high oil prices have affected Americans' buying behavior. "Historically, when gas prices come down, people use more. But we've learned a lot of new things during this period and it will be hard to go back to our gas-guzzling ways."

Thank God for consumer psychologists.  From the LA Times last week:

Americans have cut back on buying vehicles of all types as the economy continues its slide. But the slowdown has been particularly brutal for hybrids, which use electricity and gasoline as power sources. They were the industry's darling just last summer,  but sales have collapsed as consumers refuse to pay a premium for a fuel-efficient vehicle now that the average price of a gallon of gasoline nationally has slipped below $2.

"When gas prices came down, the priority of buying a hybrid fell off quite quickly," said Wes Brown, a partner at Los Angeles-based market research firm Iceology.


Prices matter.  Nearly every other form of communication, from advertising to public education to presidential fireside chats to go-green guilt promotion campaigns pale in comparison to the power of prices to affect behavior.

Postscript: I studied a lot of marketing in business school and was a marketing guy for years in corporate America.  I wonder how a marketing guy and a "consumer psychologist" differ?  The only differences I can think of are 1) a marketing guy's pay will suffer over time when he is this wrong and 2) I found in marketing that bringing facts to the table often yielded better forecasts than simply applying my personal biases and wishful thinking.  About 10 seconds of looking at how consumer focus reverted away from conservation after the oil price collapse in the 1980's might have given these guys a hint.   Particularly since the price shock of 2008 was far shorter and less severe than the shocks of the 1970's.  Here is my measure of gas price pain (I have not updated it for the recent price collapse):



  1. Chris Byrne:

    I recently went and test drove a couple hybrid SUVs.

    I went and bought a Dodge ram 2500 Diesel crew cab 4x4 instead. It's bigger, stronger, tougher, faster, can two more, is safer, is more capable, costs less, AND gets better fuel economy.

  2. ElamBend:

    A friend of mine traded in his Audi A-6 last summer and bought a Prius. This winter after a spate of snow storms (here in Chicago), I asked him how his Prius was handling the weather. He face dropped. He said it was so light that it got very little traction.

  3. Kevin:

    Assuming that a substantial fraction of hybrid sales are in California, that sales plot is useless without an indication of the date that hybrids stopped including stickers that let you drive one by yourself in the carpool lane. That change put a big dent in sales, too.

  4. K:

    Gee, who would have expected price to matter in a recession?

    Still, I doubt the numbers tell us much about the hybrid premium. The dip in hybrid sales is probably more about the economics of a single category, the midsize sedan, than about the hybrid premium.

    Hybrid sales are still dominated by the Prius. Category: midsize sedans. If a wide choice of hybrids was available across all categories we would learn more about how the premium affects sales.

    Almost no one actually needs a new midsize sedan today. How often do four people ride in one? And the Prius sells from $20K - $30K.

    If you need to cut costs on a sedan purchase you can buy just as much function for less than $20K. And if you usually pay $30K and up for your sedans you probably can keep doing so.

    In contrast to sedans the small trucks, vans and SUVs have utility. Some will sell in good and bad times. Granted many pickup and SUV sales were ego driven, and those collapse.

  5. Link:

    Is Obama smarter than an eight-grader?

    Hummers are out of fashion, but hybrids make no sense in a world of $2.00 gas. They didn't make much sense when gas was at $4.00

    I used this as an example to teach my eight-grader about payback periods. Simplified math -- you pay $10,000 more for a hybrid -- mostly because it has two engines -- how long until you get your $10,000 back.

    If you drive 15,000 miles in a year, and you get 20 mpg in a regular car, but 30 mpg in a hybrid ... you use 250 gallons less per year. So you save $500 a year with gas at $2.00. It's hard to get the savings over $1000 per year, even if you play with these assumptions ... even if gas goes back to $4.00

    My eighth-grader got it.

  6. epobirs:

    The first paragraph of that article makes everything that followed nonsense. The typical Hummer purchaser is old enough to remember the 70s. So, if that period of gas stations run dry and rationing based on whether your license plate ended in an even or odd number (in California) didn't make people permanently wary of low efficiency vehicles, why would the recent run of high prices at the pump be any different?

    And is a Hummer a low efficiency vehicle? If driven by a single person with little or no cargo, that could be a fair assessment. But if used in the manner only it or a similar design can handle, then it does remarkable things in exchange for the rate of fuel consumption. The answer isn't getting rid of such vehicles but instead innovating the underlying technology to make their power plants more versatile. This would add cost but that is for the consumer who desires the Hummer to bear.

    The reason I bought my 2000 Saturn SW2 was because it got pretty good mileage with just me at the wheel but could take a considerable load of gear and/or passengers at the temporary loss of that high mileage. For my next car I'd like something a bit bigger with the same qualities.

  7. diz:

    Would be useful to see if hyvbrids have fallen faster than overall vehicle sales.

    Eyeballing the charts suggests they have, but one really ought to control for the base level of sales if one intends to make a point abut the declining popularity of new hybrids versus declining sales of new cars in general.

  8. Malena:

    Useful to see that! And i think it actually happening that hybrids are getting more sales in my car financing in houston