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WORKING PAPER: DO NOT CITE WITHOUT PERMISSION

Comparing Resale Prices and Total Cost of Ownership for Gasoline, Hybrid and Diesel

Passenger Cars and Trucks

Elisabeth A. Gilmore (corresponding author)a, Lester B. Lave

b

a. Engineering and Public Policy and Tepper Business School, Carnegie Mellon University,

5000 Forbes Ave, Pittsburgh, PA, USA, 15213, email: eagilmore@cmu.edu, phone: 1-

412-352-9006, fax: 1-412-268-3757

b. Engineering and Public Policy and Tepper Business School, Carnegie Mellon University,

5000 Forbes Ave, Pittsburgh, PA, USA, 15213, email: lave@cmu.edu

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Abstract

Turbocharged direct injection (TDI) diesel and hybridized electric gasoline (HEV) vehicles

provide higher fuel economy, but are more expensive to manufacture and sell at higher prices

than conventional gasoline vehicles. A rational owner will expect to recover this price premium

in fuel savings and intangibles (e.g. torque, vehicle lifetime, etc…). Since most owners hold

vehicles for three to five years, the resale value must also reflect the price premium. Here, we

employ prices from used vehicle auctions to investigate depreciation mechanisms and to

compare the total of cost of ownership for TDI and HEV vehicles and paired conventional

vehicles. We find that accumulated odometer mileage accounts for a significant portion of the

auction price with monthly variability from external shocks in 2008 and 2009. For passenger

cars, we find that vehicles with higher fuel economy retain more value than the paired

conventional vehicle during periods of higher fuel costs. By contrast, the trucks lose value. We

also find that the difference in resale prices between paired vehicles exceeds the expected

discounted future fuel costs. We suggest that other attributes such as performance or prestige

account for this difference. Regardless of the mechanism, the higher resale prices justify the

higher capital cost for the TDI and HEV passenger cars and for larger TDI trucks on a total cost

of ownership basis.

Keywords: turbocharged diesel, hybrid electric vehicle, fuel economy, auction, used vehicles

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1. Introduction

Recent experiences in the United States (US) with higher fuel prices as well as security issues

and climate change have renewed interest in improving the fuel economy of passenger cars and

light-duty trucks (National Research Council, 2010). A near-term option is to shift the US fleet

from spark ignition gasoline vehicles to commercially available alternative fuel/powertrains with

higher fuel economy, namely turbocharged direct injection (TDI) diesel and hybridized electric

vehicles (HEV). Initial concerns about the lifetime of the hybrid batteries and the ability of diesel

engines to meet the more stringent federal and California air quality emission standards have

been largely allayed, increasing the potential for widespread deployment (Energy Information

Administration, 2009). These alternative vehicles, however, are more expensive to manufacturer

and so sell at a higher initial price. Assuming two vehicles equal on all attributes other than the

fuel economy (e.g. torque, lifetime, etc…), rational buyers will purchase an alternative vehicle

only if they can recover the initial price premium.

A number of previous studies have calculated whether the discounted future fuel savings over the

vehicle lifetime offset the price differential for higher fuel economy. For example, Lave and

MacLean (2002) found that a conventional gasoline option surpassed a HEV passenger car (Lave

and MacLean, 2002), while Lipman and Delucci (2006) found favorable economics for HEVs

(Lipman and Delucci, 2006). In more recent work, Keefe et al. (2008) found that advanced TDI

diesels outperformed the conventional gasoline vehicles and HEVs (Keefe et al., 2008). The

different conclusions stem largely from assumptions on the price premium and future fuel prices.

None of these studies, however, consider that most consumers own the vehicle for three to five

years only. Under these conditions, good estimates of the vehicle price at the time of resale are

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central to evaluating whether a rational buyer would opt for an alternative vehicle. The resale

value is also a measure of whether consumers are rationally internalizing expected future fuel

savings.

Several mechanisms have been proposed to explain the observed prices at resale. Early work

focused on inefficiencies in the used vehicle market. Akerlof (1970) suggested that resale prices

are biased downwards due to adverse selection which then results in low volumes of trade

(Akerlof, 1970). Leasing and manufacturer certified used vehicles appear to have lessened this

effect (e.g. Desai and Purohit, 1998, Johnson and Waldman, 2003). Third-party certifications,

recalls and government safety recommendations that influence the reputation of the brand and

model have also proven important. For example, Hollenbacher and Yerger (2001) found that

Consumer Reports influenced the depreciation rate (Hollenbacher and Yerger, 2001). More

recently, Engers et al. (2009) found that annual vehicle miles traveled (VMT), an objective

measure, explained the variation of used vehicle prices for any given brand (Engers, et al., 2009).

Resale prices for vehicles with differing fuel economy ratings are also influenced by fuel prices,

although the importance of the relationship is not clear. Greene (2010) reviewed 28 econometric

studies of consumers’ valuation of fuel economy improvements, finding divergent results that

cannot be explained by either the data or statistical approach (Greene, 2010). Two recent

working papers which employed resale prices at auction highlight these differences. Allcott and

Wozny (2010) found that consumers undervalued fuel economy improvements (Allcott and

Wozny, 2010), while Sallee et al. (2010) concluded that resale prices reflect the future fuel

savings. Sallee et al. (2010) also found important differences by brand with purchasers of Honda

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and Toyota having a higher valuation of estimated fuel savings than buyers of Chevrolets and

Fords (Sallee, et al., 2010).

Here, we evaluate how used vehicle prices vary by fuel/powertrain across brands and vehicle

classifications (e.g. passenger car and light-duty trucks) using wholesale data from Mannheim

resale auctions. We use actual vehicles that are available in the United States market for the TDI

diesel for passenger cars and full size pickup trucks and the HEV option for passenger vehicles.

Since the TDI and the HEV have inherently better fuel economy than conventional gasoline

vehicles, this work has important policy implications for the composition, fuel economy and

environmental characteristics of the vehicle fleet.

2. Method and Data

First, we develop quantitative estimates of the variation in auction prices for each vehicle in

terms of observable variables such as vehicle miles traveled during short periods of stable fuel

prices. Second, we use these models to evaluate how the future discounted fuel costs compares to

the absolute difference in resale price for the TDI or HEV paired with its conventional gasoline

alternative. Third, we apply these resale prices compare the total cost of ownership for the paired

vehicles.

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2.1 Vehicle Pairs

To isolate the effect of the fuel/powertrain, two vehicles must be considered equivalent on all

attributes. This can be accomplished by matching actual vehicles in the market that are

sufficiently similar or constructing a hypothetical vehicle through an engineering – economic

analysis. Engineering – economic analyses have been employed when the comparison vehicle

does not exist in a commercialized form, such as diesel hybrid (e.g. Greene and DeCicco, 2000)

or when a sufficiently exact match does not exist (Lave and MacLean, 2002). Lave and MacLean

(2002) applied an engineering correction to create what they termed a “performance” Toyota

Prius with acceleration comparable to a Corolla LE. The engineering costs, however, do not

represent actual prices paid by consumers. In addition, auction prices cannot be pooled easily

across models and makes. As a result, we opt to match existing vehicles. In Table 1, we present

our paired alternative and conventional fuel/powertrain for passenger cars and 2500 series trucks.

We attempt to match the vehicle as closely as possible by vehicle make, size class, body style

and available options. We caution that the TDI/HEV and its conventional gasoline alternative

may still differ on some attributes, specifically torque, expected lifetime, and other intangibles.

The Toyota Prius presents a challenge as there is no conventional model that is a direct match.

We pair the Toyota Prius with the Camry rather than the Corolla. While both of the Prius and the

Camry are classified as midsize, they differ on total space, engine size and other attributes. Thus,

the fuel economy benefit for the Prius is overstated. This, however, is a pairing of convenience

as we do not have auction data on the Corolla or the Camry Hybrid. We revisit the implications

of this pairing in the discussion.

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Table 1. Vehicle model and manufacturer pairings for alternative fuel/powertrains compared to

conventional options. The fuel economy in miles per gallon (mpg) is the combined fuel economy

values (45% highway, 55% city) from the Environmental Protection Agency (EPA) for the 2009

model year with the exception of the Jetta 4C gasoline sedan which was discontinued in 2005.

Alternative Conventional Alternative

Fuel

Economy

Conventional

Fuel

Economy

%

Change

Passenger Cars

Jetta TDI (Volkswagen) Jetta 5C (Volkswagen)a 34 24 42%

Jetta TDI (Volkswagen) Jetta 4C (Volkswagen) 34 25 36%

Hybrid Prius (Toyota) Camry Sedan (Toyota) 46 25 84%

Hybrid Civic (Honda) Civic Sedan (Honda) 42 29 45%

Luxury Passenger Cars

E320 Diesel

(Mercedes-Benz)

E350 Gasoline

(Mercedes-Benz)

26 20 30%

Trucks with Gross Vehicle Weight (GVW) > 8,500 lbsb

F250 Diesel (Ford) F250 Gasoline (Ford) 20 16 25%

Silverado 2500HD

Diesel (Chevrolet)

Silverado 2500HD

Gasoline (Chevrolet)

20 16 25%

RAM 2500 Diesel

(Dodge)

RAM 2500 Gasoline

(Dodge)

18 14 29%

a. The Jetta 5C gasoline S/SE sedan replaced the Jetta 4C gasoline vehicle in 2005. We

compare the Jetta TDI for sale years prior to 2008 to the Jetta 4C. For 2008 – 2009, we

compare the Jetta TDI to the Jetta 5C.

b. Trucks with GVW > 8,500 lbs are exempt from reporting fuel economy to the EPA.

Vincentric provided the data for our analysis (Vincentric, 2010).

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2.2 Auction Price Model

First, we develop a model to explain the observed sales price in wholesale auction markets for

the vehicles listed in Table 1. We propose a model where the proportion of the price remaining

on the vehicle depends on the accumulated mileage and other attributes associated with the

vehicle type. We opt for mileage rather than vehicle age as recent literature suggests that

odometer mileage is a stronger determinant of the resale price than age (Engers, et al., 2009). We

also evaluate pooling all time periods, using yearly dummies and using monthly dummies. In

addition to this base model, we also investigate adding terms to the mileage including vehicle

condition and vehicle age. For the trucks, we also investigate the effect of cabin size. We show

the base model in Equation 1.

SPijt/IPijt = αj x Oijt + δijt + εijt …Eqn 1

Where SPijt is the sales price at auction for the ith

vehicle of type j at time, t;

IPijt is the initial price paid for the ith

vehicle of type j at time, t;

Oijt is the recorded mileage on the vehicle at the time of auction divided by 15,000 miles,

(an approximation of annual miles travelled);

αj is the estimated depreciation rate with respect to mileage;

δijt is the fixed effects of vehicle type and for time; and,

εijt is the error term.

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In the exploratory data analysis, we found that this linear model fits well for odometer readings

less than 100,000 miles. For vehicles with over 100,000 miles, we do not correct for mileage but

rather average price across all vehicles of this type auctioned due to small samples sizes.

Mannheim, the largest automobile auctioneer in the US, provided sales prices from their auctions

for this analysis (Mannheim, 2010). Each auction record contains the sales price, the odometer

mileage, the model year and, when available, a condition grade assigned by the reviewers who

collect this data for Mannheim. The vehicle age is not noted in the records; we calculate age by

subtracting the vehicle model year from the sales year. The model year and the actual calendar

year of production do not always coincide. Since vehicles cannot have a model year less than 0,

we assume that vehicles sold in their model year are 1 year old. The principal buyers in the

auctions are dealers who intend to resell the used vehicle to customers.

For each month, we draw up to 10 transactions from five mileage bins (i.e., 0 – 25,000; 25,000 –

50,000; 50,000 – 75,000; 75,000 – 100,000; 100,000 – 150,000 miles). This sampling plan yields

a maximum of 50 records for each vehicle for each month. For the Volkswagen Jetta 4C

gasoline, the Volkswagen Jetta TDI, the Ford F250 gasoline and the Ford F250 diesel, we extract

records by month for January 2002 – December 2003 and January 2005 – December 2009.

Records for 2004 were not made available. For the Toyota Camry and Prius, we extract records

for January 2007 – December 2009. For the remainder of the vehicles, we have records for

January 2008 – December 2009. These dates were selected based on the maturity of the market

for the vehicle (e.g. excluding the initial years of sales after introduction to the market for the

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five cylinder Volkswagen Jetta and Toyota Prius) as well as the interesting features in gasoline

and diesel fuel prices. We note that 2008 and 2009 had unusual macroeconomic conditions.

However, the variation in the fuel prices is also pronounced during this time period making this

an interesting period to evaluate the benefits of fuel/powertrains with higher fuel economy. We

show median auction prices with 25 and 75 percentiles by vehicle type for odometer readings

less than and greater than 100,000 in Table 2 for passenger cars and 2500 series trucks.

Since we are interested in the ratio between the resale price and the initial purchase price, we

also need to establish the purchase prices of each vehicle model and year. We match each

auction record with the manufacturer’s suggested retail price (MSRP) for the vehicle at the time

of purchase. We obtained these prices from the BlackBook database (Blackbook, 2010). No

adjustments were made for vehicle features (e.g. sunroofs, audio systems, etc…) since this level

of data is not available in the auction records. We caution that the MSRP is not generally the

transaction price for new vehicles. Dealers provide concessions on the sticker price or may

charge additional markups for popular models. We could not find a data source with actual prices

paid over the time period of interest. To calculate the resale ratio, we correct all prices for

inflation to prices at December 2009 by applying the Consumer Price Index (CPI) for used

vehicles to the Mannheim resale prices and the CPI for new vehicles to the initial purchasing

prices (US Bureau of Labor Statistics, 2010).

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Table 2: Number of records and median prices with inner quartile (25 and 75 percentiles)

statistics for CPI adjusted sales price and resale ratio for passenger vehicles. We show the prices

separately for vehicles with less than and greater than 100,000 accumulated odometer mileage.

Vehicle N < 100,000 miles N > 100,000 miles

Passenger Cars

Jetta TDI Diesel

(Volkswagen)

2971 $13,500

(10,400 – 17,100)

0.660

(0.523 – 0.797)

617 $7,030

(5,060 – 8,800)

0.366

(0.275 – 0.446)

Jetta 4C Gasoline

(Volkswagen)

3313 $8,370

(5,810 – 10,700)

0.455

(0.324 – 0.579)

817 $2,860

(1,980 – 3,880)

0.173

(0.125 – 0.229)

Jetta 5C Gasoline

(Volkswagen)

940 $11,000

(8,800 – 13,300)

0.528

(0.421 – 0.658)

91 $6,500

(5,580 – 7,010)

0.308

(0.268 – 0.332)

Hybrid Prius Gasoline

(Toyota)

1437 $15,800

(12,000 – 18,800)

0.725

(0.556 – 0.858)

307 $6,940

(5,340 – 8,500)

0.339

(0.270 – 0.409)

Camry Sedan Gasoline

(Toyota)

1424 $12,400

(8,920 – 16,100)

0.598

(0.439 – 0.755)

325 $5,900

(4,590 – 7,300)

0.295

(0.239 – 0.363)

Hybrid Civic Gasoline

(Honda)

944 $13,800

(9,760 – 17,700)

0.616

(0.454 – 0.779)

217 $6,150

(5,040 – 7,360)

0.293

(0.242 – 0.348)

Civic Sedan Gasoline

(Honda)

955 $10,500

(7,160 – 14,200)

0.596

(0.429 – 0.761)

222 $4,200

(3,370 – 4,970)

0.262

(0.216 – 0.317)

Luxury Passenger Cars

E320 Diesel

(Mercedes-Benz)

660 $29,000

(24,700 – 35,500)

0.566

(0.482 – 0.688)

15 $21,300

(18,000 – 23,300)

0.419

(0.354 – 0.457)

E350 Gasoline

(Mercedes-Benz)

867 $23,900

(19,800 – 29,000)

0.467

(0.390 – 0.563)

20 $16,700

(15,200 – 18,400)

0.322

(0.301 – 0.351)

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Trucks with Gross Vehicle Weight (GVW) > 8,500 lbs

Silverado 2500HD Diesel

(Chevrolet)

960 $24,700

(18,700 – 29,500)

0.638

(0.484 – 0.769)

240 $13,250

(9,660 – 16,000)

0.317

(0.260 – 0.394)

Silverado 2500HD Gasoline

(Chevrolet)

960 $13,100

(9,550 – 17,800)

0.431

(0.324 – 0.581)

240 $6,270

(4,520 – 8,700)

0.220

(0.161 – 0.273)

RAM 2500 Diesel

(Dodge)

959 $22,100

(17,500 – 26,200)

0.551

(0.459 – 0.638)

237 $11,700

(8,900 – 15,000)

0.340

(0.257 – 0.407)

RAM 2500 Gasoline

(Dodge)

960 $13,800

(9,550 – 18,700)

0.416

(0.300 – 0.529)

240 $6,060

(4,620 – 7,940)

0.205

(0.166 – 0.258)

F250 Diesel

(Ford)

3400 $23,500

(18,900 – 28,000)

0.611

(0.502 – 0.715)

479 $13,700

(10,500 – 16,600)

0.265

(0.280 – 0.446)

F250 Gasoline

(Ford)

2372 $13,500

(9,590 – 17,900)

0.496

(0.376 – 0.631)

846 $6,560

(5,060 – 8,300)

0.264

(0.205 – 0.323)

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2.3 Comparing Average Resale Prices to Expected Future Fuel Costs

Having established an appropriate depreciation schedule for each vehicle, we investigate whether

sales prices at auction for the TDI diesel and HEV options are consistent with their improved

fuel economy and fuel prices. Imagine a rational consumer who is deciding between two

vehicles. Vehicle A has a higher fuel economy than vehicle B, and the consumer is equally

satisfied with all other vehicle attributes. The consumer should be willing to pay a premium for

the vehicle with the greater fuel economy equal to the difference in the expected discount value

of the future fuel savings. If the consumer pays less, then the consumer is undervaluing the fuel

saving. If the consumer pays more, then the consumer is overvaluing the fuel savings.

Alternatively, the advanced vehicle may be valued more highly, apart from the fuel savings

We show the relationship between the sales price at auction (RS) and the discounted fuel costs

(EFC) in Equation 2, where θ is the coefficient of the proportion of the fuel economy savings

accounted for in the sales price. If θ > 1, then the consumer is paying more than the fuel savings

for the alternative vehicle. By contrast, if θ < 1, then the consumer is not valuing the full amount

of the fuel savings. We calculate the resale value using our depreciation model for each month,

assuming a five year old vehicle with 75,000 miles on the odometer.

ΔRS = θ x ΔEFC …Eqn 2.

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The expected discounted fuel costs are a function of the fuel economy, the expected fuel prices,

the miles traveled per year, the remaining lifetime miles on the vehicle, and the discount rate. We

show this in Equation 3.

Where n is the age corresponding to the mileage at the vehicle lifetime;

r is the discount rate;

Mi is the miles driven as function of the vehicle age, i;

FPi is expected fuel price at vehicle age, i, in $/gallon; and,

MPG is the fuel economy of the vehicle in miles/gallon.

To calculate the annual miles driven as a function of age, we apply the relationships developed

by the National Highway Transportation Safety Administration (NHTSA) (National Highway

Traffic Safety Administration, 2006). Sallee et al. (2010) also included the survival rate

developed in NHTSA (2006) as part of their expected discounted fuel costs (Sallee, et al., 2010).

We explore the effect of including this term by using vehicle miles traveled as well as expected

number of surviving vehicles (e.g. vehicle miles traveled multiplied by the survival estimates).

We caution that the NTHSA relationships are an average of all vehicles and may not represent

differences in driving behavior or survival rates for the diesel or hybrid vehicles. We are not

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aware of any data source that disaggregates the vehicles miles and survival rates by vehicle type.

In the NHTSA dataset, a few vehicles are driven up to an age of 25 years. These vehicles are

driven to approximately 152,137 lifetime miles for passenger cars and 179,954 miles for light

duty trucks, respectively.

In addition to the vehicle miles traveled, we must also establish expected fuel prices. Approaches

range from assuming that consumers view fuel prices as a random walk such that the price at the

time of purchase is the best indication of future fuel costs to assuming highly rational consumers

who develop their expectation from future oil prices on the NYMEX (e.g. Allcott and Wozny,

2010). The literature does not provide any clear guidance on which approach most closely

captures consumers’ expectations. In this work, we use the random walk approach as our base

case and investigate an alternative specification using the projections from the Energy

Information Agency (EIA) in the Annual Energy Outlook series (Energy Information Agency,

2010).

Finally, we must specify the discount rate. In the summary by Greene (2010), the implied

discount rate that consumers apply to future fuel savings ranged from market rates at 5% to

highly myopic rates at 75%. Since we are investigating how a rational consumer responds to fuel

economy improvements, we apply a discount rate of 5% in our base model which corresponds to

the interest rate that consumers pay for financing and vehicle loans. We present a sensitivity

analysis using 0% and 10%.

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2.4 Total Cost of Ownership Analysis

To evaluate how the resale prices influence the decision of which new vehicle to purchase, we

calculate the total cost of ownership as a net present value (NPV) for each vehicle in the dataset.

The NPV calculation involves taking all benefits and costs and expressing them in present

dollars by applying a discount rate as shown in Equation 4. The capital costs, maintenance,

repairs, insurance and licensing fees are from Vincentric (Vincentric, 2010). The registration and

taxes are developed from national averages. For two vehicles which are similar on all attributes,

the vehicle with the lowest NPV is the preferred option.

Where NPV is the net present value (in $);

CCo is the capital cost (e.g. MSRP) (in $);

TXo is the taxes and registration at the time of purchase (in $);

EXt is the insurance and licensing in any given year, t (in $);

FCt is the cost of fuel in any given year, t (in $);

OMt is the cost of maintenance and repairs in any given year, t (in $);

RSn is the resale price at the cumulative miles in the final year of ownership, n;

r is the real discount rate; and,

n is the number of years of ownership.

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The fuel costs in any given year, t, (FCt) are calculated using Equation 5.

FCt = FPt/MPG x VMTt …Eqn 5

Where FPt is the fuel price in any given year (in $/gallon);

MPG is the EPA combined fuel economy for the vehicle type (in miles per gallon); and,

VMTt is the vehicle miles travelled in any given year (in miles).

3. Results and Discussion

3.1 Depreciation Rates by Vehicle

In Table 3, we show the regression coefficients for the linear model for resale ratio as a function

of the odometer mileage for a pooled time period of 2008 – 2009 as well as the average for

vehicles with odometer readings greater than 100,000 miles. We also present the ratio at 75,000

miles, corresponding to a vehicle of approximately 5 years old. For all vehicles, mileage has a

statistically significant influence on the depreciation rates. Adding age and condition grade do

not improve the regression due to substantial co-linearity between these variables and mileage.

We also investigate the effect of adding fixed effects for time. In Figure 1, we show the resale

ratio at 75,000 miles for the Volkswagen Jetta vehicles with fixed effects for each vehicle type

for each month in panel (a) and the difference between the Volkswagen Jetta TDI and the

Volkswagen Jetta 4C gasoline and the Volkswagen Jetta TDI and the Volkswagen Jetta 5C

gasoline by month in panel (b) for 2002 – 2009. In Figures 2 and 3, we show the same plot for

the Toyota Prius compared to the Camry and the diesel trucks compared to the gasoline trucks

for 2008 – 2009. In Supplementary Data, we show the plots for the comparison between the

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Honda Civic hybrid and Honda Civic, the Mercedes Benz E350 gasoline and the E320 diesel and

the Ford F250 diesel and gasoline for 2002 – 2003 and 2005 – 2009.

For the passenger cars, we find that the TDI diesel vehicles and the Toyota Prius retain a greater

percentage of their initial purchase price than the conventional gasoline vehicles controlling for

mileage. For the trucks, we find that the diesel engines retain a higher percentage of their initial

price than the gasoline options with the Chevrolet and the Dodge trucks outperforming the Ford

F250. This may be due in part to the known quality problems with the diesel engine installed in

this generation of Ford trucks (Truett, 2009). As cabin size increases, more trucks are installed

with diesel engines. These larger diesel vehicles retain a larger portion of their total price

compared to the gasoline equivalents. We observe the same trends controlling for the sales

month as with the pooled data, although the time dummy shows that there is significant variation

in the ratios by month. For all vehicles, we observe higher prices in the beginning of 2008 falling

abruptly through the end of that year and increasing through 2009, as fuel prices first rose and

then fell. For the Volkswagen Jetta TDI and the Toyota Prius compared to the similar

conventional option, we observe large differences in the resale ratio of approximately +0.3 in the

summer of 2008 as gasoline and diesel prices rose to record levels; when gasoline and diesel

prices fell sharply in 2009, the differences fell to less than +0.1. For the Honda Civic and the

Mercedes Benz E Series, the resale ratio for the advanced vehicles is higher during the 2008

period and is comparable to the conventional vehicle in 2009. A different pattern is observed for

the trucks. For the Chevrolet and the Dodge trucks, the resale ratio fell in the summer of 2008

and rose in 2009. We conjecture that the higher fuel prices in the summer of 2008 drove down

the price of all trucks with a rebound in their price in 2009 when fuel prices were lower. The

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differences between the alternative and conventional vehicle are not as pronounced over 100,000

miles. This may be indicative of an inefficient market where all vehicles at higher mileages are

considered equal to consumers despite the possible longer lifetimes for diesel engines.

Alternatively, the engine may not be limiting component with respect to vehicle lifetime.

A limitation of this study is that we can observe only the vehicles that are sold in auction. As

vehicles age, we expect more will be scrapped, particularly those with the most miles. Thus, the

prices observed in the auction will be for vehicles in better condition and those with fewer miles

than the average vehicle of that vintage. We hypothesize that if the resale prices for all the

vehicles of a particular vintage were observed, the average price would be lower. This selection

bias would cause the rate of decline in price to be underestimated. Scrappage rates would allow

us to control for this effect. However, we are not aware of any source that has disaggregated

scrappage rate data by fuel/powertrain or vehicle type. Additionally, we do not account for the

influence of supply on the auction prices. Diesel and hybridized vehicles comprise less than 2%

of the light-duty vehicle fleet. If the number of vehicles offered to the market were to rise or fall,

the resale prices would be likely to fall or rise, respectively.

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Table 3. Regression coefficients and resale ratio at 75,000 miles as a function of mileage, pooled

over 2008 – 2009 sales years and the average ratio for vehicles with greater than 100,000 miles.

We show the trucks separated into regular, extended and crew cabin sizes for the Chevrolet

Silverado 2500HD and the Ford F250. The Dodge RAM 2500 is available as a regular, a quad

version, which is similar to a crew cab, and a mega cab. We do not show the average ratio for

odometer mileage greater than 100,000 miles since the sample sizes are too small when

disaggregated by cab type.

Vehicle Intercept Slope Adjusted Ratio at

75,000 miles

Average Ratio

>100,000 miles

Passenger Cars

Jetta TDI Diesel

(Volkswagen) 0.966 -0.0858 0.538 0.350

Jetta 4C Gasoline

(Volkswagen) 0.612 -0.0626 0.299 0.179

Jetta 5C Gasoline

(Volkswagen) 0.775 -0.0756 0.398 0.304

Hybrid Prius Gasoline

(Toyota) 0.998 -0.0853 0.572 0.352

Camry Sedan Gasoline

(Toyota) 0.865 -0.0831 0.449 0.307

Hybrid Civic Gasoline

(Honda) 0.899 -0.0849 0.474 0.300

Civic Sedan Gasoline

(Honda) 0.892 -0.0897 0.443 0.265

Luxury Passenger Cars

E320 Diesel (Mercedes-

Benz) 0.784 -0.0759 0.405 0.423

E350 Gasoline

(Mercedes-Benz) 0.673 -0.0619 0.363 0.331

Trucks with Gross Vehicle Weight (GVW) > 8,500 lbs

Silverado 2500HD Diesel

(Chevrolet) 0.879 -0.0746 0.506 0.336

Regular 0.807 -0.0717 0.448

Extended 0.807 -0.0718 0.448

Crew 0.886 -0.0728 0.523

Silverado 2500HD

Gasoline (Chevrolet) 0.699 -0.0699 0.349 0.225

Regular 0.632 -0.0660 0.302

21

Extended 0.686 -0.0676 0.347

Crew 0.750 -0.0755 0.373

RAM 2500 Diesel

(Dodge) 0.707 -0.0478 0.468 0.336

Regular 0.620 -0.0510 0.365

Quad 0.710 -0.0461 0.479

Mega 0.675 -0.0328 0.511

RAM 2500 Gasoline

(Dodge) 0.624 -0.0605 0.321 0.215

Regular 0.624 -0.0605 0.321

Quad 0.630 -0.0593 0.334

Mega 0.628 -0.0369 0.444

F250 Diesel (Ford) 0.692 -0.0511 0.437 0.297

Regular 0.632 -0.0561 0.351

Extended 0.648 -0.0535 0.380

Crew 0.706 -0.0495 0.459

F250 Gasoline (Ford) 0.705 -0.0769 0.321 0.204

Regular 0.641 -0.0722 0.280

Extended 0.659 -0.0591 0.364

Crew 0.748 -0.0805 0.345

22

3.2 Valuation of Fuel Economy

In Figures 1 – 3, we observe that the absolute resale ratios and the difference between the resale

ratios for the alternative and conventional vehicles vary as a function of fuel price. Rational

consumers should pay the difference in the expected discounted fuel costs when purchasing a

vehicle with a higher fuel economy over one with lower fuel economy. For the passenger cars,

we observe that the advanced vehicles with their higher fuel economy rise in price compared to

the conventional vehicles during record high fuel prices. While the price rise is rational, the

extent of the resale price rise depends on expectations of future fuel prices. We reflect that the

qualitative trend reflects rationality.

To evaluate whether consumers rationally value the fuel savings, we use the resale relationships

to calculate the difference in the resale price and then compare it to the fuel savings for each

paired vehicle. In Figure 4, we show the average portion of the difference in the resale price that

can be accounted for by the expected future fuel savings for the paired vehicles at 75,000 miles.

We perform this calculation for each month using a random walk approach (i.e., the observed

price in the month of sale is the expected price in all future periods) as our base model. We do

not find significantly different results using alternative specifications for fuel prices. We find that

for the TDI diesel – gasoline comparisons, with the exception of the Mercedes Benz luxury

vehicles, the future fuel savings accounts for approximately 20% of the difference in resale price.

To the extent that the paired vehicles are considered the same on all attributes, this result would

suggest that the consumers in the wholesale market are over valuing the fuel economy savings.

By contrast, for the comparison of the Toyota Prius and Camry, we find that the fuel savings are

23

closely reflected in the difference in the resale prices. This is consistent with some limited survey

data that finds that diesel vehicle owners focus on the performance and other aspects of the diesel

vehicles; they are significantly less concerned with fuel economy than hybrid owners (Fischbeck,

et al., 2007). We postulate, however, that consumers are also placing value on attributes such as

environmental characteristics, torque, performance, and possibly longer vehicle lifetimes that we

have not captured in our model. Finally, we note that the EPA fuel economy may not reflect

actual driving conditions. Under some driving conditions, diesel vehicle may actually achieve

higher fuel efficiencies than comparable HEVs (Energy Information Administration, 2009).

24

Figure 1: (a) Resale ratios at 75,000 miles for the Volkswagen Jetta 4C gasoline, 5C gasoline and

TDI as function of mileage for each month (2002 – 2003, 2005 – 2009); (b) Difference between

the resale ratios between the diesel and the gasoline options

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Ja

n-0

2

Ap

r-0

2

Ju

l-0

2

Oct-

02

Ja

n-0

3

Ap

r-0

3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Re

sa

le R

ati

o

Volkswagen Jetta 4C Gasoline

Volkswagen Jetta 5C Gasoline

Volkswagen Jetta TDI Diesel

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Ja

n-0

2

Ap

r-0

2

Ju

l-0

2

Oct-

02

Ja

n-0

3

Ap

r-0

3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Re

sa

le R

ati

o

Volkswagen Jetta TDI Diesel - 4C Gasoline

Volkswagen Jetta TDI Diesel - 5C Gasoline

(a)

(b)

25

Figure 2: (a) Resale ratios at 75,000 miles for the Toyota Prius and Camry as function of mileage

for each month (2007 – 2009); (b) Difference between the resale ratios between the diesel and

the gasoline options

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9Ja

n-0

7F

eb

-07

Ma

r-0

7A

pr-

07

Ma

y-0

7Ju

n-0

7Ju

l-0

7A

ug

-07

Se

p-0

7O

ct-

07

No

v-0

7D

ec-0

7Ja

n-0

8F

eb

-08

Ma

r-0

8A

pr-

08

Ma

y-0

8Ju

n-0

8Ju

l-0

8A

ug

-08

Se

p-0

8O

ct-

08

No

v-0

8D

ec-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-0

9A

ug

-09

Se

p-0

9O

ct-

09

No

v-0

9

Re

sa

le R

ati

o

Toyota Camry

Toyota Prius

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

Ja

n-0

7F

eb

-07

Ma

r-0

7A

pr-

07

Ma

y-0

7Ju

n-0

7Ju

l-0

7A

ug

-07

Se

p-0

7O

ct-

07

No

v-0

7D

ec-0

7Ja

n-0

8F

eb

-08

Ma

r-0

8A

pr-

08

Ma

y-0

8Ju

n-0

8Ju

l-0

8A

ug

-08

Se

p-0

8O

ct-

08

No

v-0

8D

ec-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-0

9A

ug

-09

Se

p-0

9O

ct-

09

No

v-0

9

Re

sa

le R

ati

o

Toyota Prius - Camry

(a)

(b)

26

Figure 3: (a) Resale ratios at 75,000 miles for the diesel and gasoline trucks as function of

mileage for each month (2008 – 2009); (b) Difference between the resale ratios between the

diesel and the gasoline options

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Ja

n-0

8

Fe

b-0

8

Ma

r-08

Ap

r-08

Ma

y-0

8

Ju

n-0

8

Ju

l-08

Au

g-0

8

Se

p-0

8

Oct-0

8

No

v-0

8

De

c-0

8

Ja

n-0

9

Fe

b-0

9

Ma

r-09

Ap

r-09

Ma

y-0

9

Ju

n-0

9

Ju

l-09

Au

g-0

9

Se

p-0

9

Oct-0

9

No

v-0

9

Re

sa

le R

ati

o

Ford F250 Diesel

Dodge RAM 2500 Diesel

Chevrolet Silverado 2500HD Diesel

Ford F250 Gasoline

Dodge RAM 2500 Gasoline

Chevrolet Silverado 2500HD Gasoline

0

0.05

0.1

0.15

0.2

0.25

Ja

n-0

8

Fe

b-0

8

Ma

r-08

Ap

r-08

Ma

y-0

8

Ju

n-0

8

Ju

l-08

Au

g-0

8

Se

p-0

8

Oct-0

8

No

v-0

8

De

c-0

8

Ja

n-0

9

Fe

b-0

9

Ma

r-09

Ap

r-09

Ma

y-0

9

Ju

n-0

9

Ju

l-09

Au

g-0

9

Se

p-0

9

Oct-0

9

No

v-0

9

Re

sa

le R

ati

o

Ford F250 Diesel - Gasoline

Dodge RAM 2500 Diesel - Gasoline

Chevrolet Silverado 2500HD Diesel - Gasoline

(a)

(b)

27

Figure 4: Difference in resale prices (white bar) and the discounted expected fuel savings (grey

bar) for the paired vehicles at 75,000 miles. The results are averaged over 2008 - 2009. The

portion of the difference in the resale price accounted for by the expected future fuel savings for

the vehicle pairs is higher for the Toyota Prius – Camry than the Jetta. The future fuel savings

between the diesel and gasoline engines accounts for less than 20% of the difference in the resale

price for the trucks.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Toyo

ta P

riu

s -

Ca

mry

Ho

nd

a C

ivic

Vo

lksw

ag

en

Je

tta

Me

rce

de

s-B

en

z

E S

eri

es

Fo

rd F

25

0

Ch

evro

let

Silve

rad

o

25

00

HD

Do

dg

e R

AM

2

50

0

Dif

fere

nc

e in

Re

sa

le V

alu

e (in

$)

28

3.3 Total Cost of Ownership Analysis

The final goal of this work is to investigate how the observed resale prices influence the cost of

owning the alternative fuel/powertrain vehicles. As noted, most previous studies assume that the

vehicle will be owned by a single consumer for its entire lifetime. Since the original owner now

frequently holds the vehicle for three to five years only, having good estimates of the resale price

is important for consumer purchases decisions. While the resale prices at auction are not the

prices that the consumer will received as a trade-in or in private sale, we assume that that

advanced and conventional vehicles will have the same percentage discount or premium relative

to these auction prices. If so, the prices are appropriate for the comparison of two vehicles. In

Figure 5, we show the differences in the net present value for the vehicle pairs accounting for the

resale price.

For the passenger vehicles, the Volkswagen Jetta, Mercedes Benz E Series and the Toyota Prius

– Camry show better value for the TDI diesel or HEV option. Interest rates of 0% to 10% would

not change the customer decision. We caution that the Toyota Prius and Camry pairing is

inexact. It may overstate the value of the hybrid option since the Camry is a larger vehicle than

the Prius. In addition, the Prius has signaling value as a “green” vehicle. By contrast, we find that

the Honda Civic hybrid does not perform better than the Honda Civic.

For the Chevrolet Silverado and Dodge Ram, the TDI diesel is preferred at interest rates of 0 and

5%, but not at a 10% interest rate. The diesel trucks in our dataset are on average bigger (e.g.

crew cab configurations) compared to the gasoline options. Disaggregating the trucks by cabin

29

size, we find that that the preference for diesels increases at larger size vehicles. We show the

total cost of ownership by trucks brand and by cabin size in the Supplementary Data. For Ford

F250, the gasoline version is preferred for all interest rates which we attribute to the historical

poor performance of the F250 diesel engine.

Figure 5: The difference in net present value at a discount rate of 5%. The low error bar

represents a discount rate at 0%. The high error bar represents a discount rate of 10%. If the

difference is negative, the consumer prefers the advanced vehicle over the conventional option.

If the difference is positive, the consumer prefers the conventional vehicle over the advanced

option.

-$8,000

-$6,000

-$4,000

-$2,000

$0

$2,000

$4,000

Volkswagen JettaDiesel

Gasoline

ToyotaPrius Hybrid

Camry Gasoline

Honda CivicHybrid

Gasoline

Mercedes-Benz E320 Diesel

E350 Gasoline

Ford F250 Diesel

Gasoline

Chevrolet Silverado 2500HDDiesel

Gasoline

Dodge RAM 2500Diesel

Gasoline

Dif

fere

nc

e in

To

tal C

os

t (i

n $

)

30

4. Conclusions

Whether paying a premium for an alternative fuel/powertrain vehicle results in a lower lifetime

cost of owning the vehicle compared to a conventional fuel/powertrain depends on the fuel price

and willingness to pay for other attributes. When the vehicle is sold after three to five years, the

answer also depends on the resale price of the two vehicles. We have examined auction data for

used vehicles to estimate resale prices as a function of fuel/powertrain, vehicle type, fuel price,

and other attributes. We find that a linear relationship between resale ratio and mileage is a good

fit and provides easy to interpret coefficients. For passenger vehicles, we find that the

Volkswagen Jetta TDI diesel and Toyota Prius hybrid retain their value better than comparable

gasoline vehicles. For Chevrolet Silverado and the Dodge RAM light duty trucks, the diesel

version retains a greater value than the gasoline version. This is especially pronounced at the

larger cab sizes. We find that fuel prices influence the resale price with higher fuel prices

favoring the higher fuel economy vehicles, such as the Volkswagen Jetta TDI and the Toyota

Prius. For the diesel – gasoline comparisons, we find that only 20% of the difference in the resale

prices can be explained by the expected future fuel savings. This is in contrast to the Toyota

Prius – Camry comparison where the future fuel savings accounts for almost the entire difference

in capital cost. We postulate that diesel consumers, for example, may place value on some

features that are unobserved in this data such as power and torque. Over a five year ownership

period, these higher resale prices have a significant effect on the vehicle preference. Regardless

of the mechanism, we conclude that alternative fuel/powertrain vehicles such as the Volkswagen

Jetta TDI and the Toyota Prius could be competitive compared to other passenger vehicles

available in the United States marketplace.

31

We caution that the analysis is not able to account for feature that might be important. For

example, MSRP may overstate the price paid for conventional vehicles, biasing our estimate of

ownership costs upward. Resale price may reflect the scarcity or abundance of vehicles of that

type in the market, such as the relative scarcity of the Toyota Prius, due to limiting sales.

Acknowledgements

The authors acknowledge funding from the Carnegie Mellon Bosch Institute (CBI) and Robert

Bosch LLC, North America. Specifically, they would like to thank Felicitas Rawe, Jessica

Katterheinrich, Ben Berlasi and Lars Ullrich at Robert Bosch LLC and Sylvia Vogt at CBI. We

also acknowledge Mannheim Auctions, Vincentric and Blackbook for providing useful data

which allowed us to complete this work. The authors are solely responsible for the content of this

paper.

32

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35

Supplementary Data for Comparing Resale Prices and Total Cost of Ownership for

Gasoline, Hybrid and Diesel Passenger Cars and Trucks

Figure S1: (a) Adjusted resale ratios for the Honda Civic and the Honda Civic Hybrid as function

of mileage for each month; (b) Difference between the adjusted resale ratios between the hybrid

and the conventional gasoline option

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Re

sa

le R

ati

o

Honda Civic Gasoline

Honda Civic Hybrid Gasoline

-0.1

-0.05

0

0.05

0.1

0.15

0.2

Re

sa

le R

ati

o

Honda Civic Hybrid - Sedan Gasoline

36

Figure S2: (a) Adjusted resale ratios for the Mercedes-Benz diesel (E320) and gasoline (E350) as

function of mileage for each month; (b) Difference between the adjusted resale ratios between

the diesel and the conventional gasoline option

0

0.1

0.2

0.3

0.4

0.5

0.6

Re

sa

le R

ati

o

Mercedes Benz E Series Gasoline

Mercedes Benz E Series Diesel

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

Re

sa

le R

ati

o

Mercedes Benz E Series Diesel - Gasoline

37

Figure S3: (a) Adjusted resale ratios for the Ford F250 diesel and gasoline as function of mileage

for each month for 2003 - 2009; (b) the Difference between the adjusted resale ratios between the

hybrid and the conventional gasoline option

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Re

sa

le R

ati

o

Ford F250 Gasoline

Ford F250 Diesel

0

0.05

0.1

0.15

0.2

0.25

0.3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Re

sa

le R

ati

o

Ford F250 Diesel - Gasoline

38

Figure S4: The difference in net present value for the Chevrolet Silverado 2500HD by cab size.

If the difference is negative, the consumer prefers the advanced vehicle over the conventional

one. If the difference is positive, the consumer prefers the conventional vehicle over the

advanced one.

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

Regular Extended Crew

Dif

fere

nc

e in

To

tal C

os

t (i

n $

)

39

Figure S5: The difference in net present value for the Dodge RAM 2500 by cab size. If the

difference is negative, the consumer prefers the advanced vehicle over the conventional one. If

the difference is positive, the consumer prefers the conventional vehicle over the advanced one.

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

Regular Quad (Crew)

Dif

fere

nc

e in

To

tal C

os

t (i

n $

)

40

Figure S6: The difference in net present value for the Ford F250 by cab size. If the difference is

negative, the consumer prefers the advanced vehicle over the conventional one. If the difference

is positive, the consumer prefers the conventional vehicle over the advanced one.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Regular Extended Crew

Dif

fere

nc

e in

To

tal C

os

t (i

n $

)