APPENDIX 9

- A. RELATIVE PRICE ELAST ICITY OF DEMAND FOR APPLIANCE S

TABLE OF CO NTENTS

9

- A.1 INTRODUCTION

................................ ................................ ................................ . 9

- A

- 1 9

- A.2 LITERATURE REVIEW

................................ ................................ ...................... 9

- A

- 1 9

- A.2.1 Price

................................ ................................ ................................ ....................... 9

- A

- 1 9

- A.2.2 Income

................................ ................................ ................................ .................... 9

- A

- 1 9

- A.2.3 Appliance Efficiency and Discount Rates

................................ ............................. 9

- A

- 2 9

- A.3 VARIABLES DESCRIBING THE MARKET FOR REFRIGERATORS, CLOTHES WASHERS, AND DISHWASHERS

................................ ................. 9

- A

- 2 9

- A.3.1 Physical Household/Appliance Variables

................................ .............................. 9

- A

- 3 9

- A.3.2 Economic variables

................................ ................................ ................................ 9

- A

- 3 9

- A.4 REGRESSION ANALYSIS OF VARIABLES AFFECTI NG APPLIANCE SHIPMENTS

................................ ................................ ................................ ......... 9

- A

- 4 9

- A.4.1 Broad Trends

................................ ................................ ................................ .......... 9

- A

- 5 9

- A.4.2 Specification of Model

................................ ................................ ........................... 9

- A

- 7 9

- A.4.3 Discussion of Model

................................ ................................ .............................. 9

- A

- 8 9

- A.4.4 Analysis Results

................................ ................................ ................................ ..... 9

- A

- 8 9

- A.4.4.1 Individual Appliance Model

................................ ................................ 9

- A

- 9 9

- A.4.4.2 Combined Appliance Model

................................ ................................ 9

- A

- 9 9

- A.4.5 Additional Regression Specifications and Results

................................ .............. 9

- A

- 10 9

- A.4.5.1 Lower Consumer Discount Rate

................................ ........................ 9

- A

- 10 9

- A.4.5.2 Disaggregated Variables

................................ ................................ .... 9

- A

- 11 9

- A.5 LONG RUN IMPACTS

................................ ................................ ....................... 9

- A

- 12 9

- A.6 SUMMARY

................................ ................................ ................................ ......... 9

- A

- 13 9

- A.7 DATA USED IN THE ANALYSIS

................................ ................................ .... 9

- A

- 14

LIST OF TABLES

Table 9

- A.2.1 Estimates of the Impact of Price, Income and Efficiency on Automobile and Appliance Sales

................................ ............................... 9

- A

- 2 Table 9

- A.3.1 Physical Household/Appliance Variables

................................ .................. 9

- A

- 3 Table 9

- A.3.2 Economic Variables

................................ ................................ ................... 9

- A

- 4 Table 9

- A.4.1 Estimate of Total Price Elasticity of Demand

................................ ............ 9

- A

- 6 Table 9

- A.4.2 Tabular Estimate of Relative Price Elasticity of Appliance Demand

........ 9

- A

- 7 Table 9

- A.4.3 Individual Appliance Model Results

................................ ......................... 9

- A

- 9 Table 9

- A.4.4 Combined Appliance Model Result

................................ ......................... 9

- A

- 10 Table 9

- A.4.5 Combined and Individual Results, 20 percent discount rate

.................... 9

- A

- 11 Table 9

- A.4.6 Disaggregated Regression Results, 37 percent discount rate

................... 9

- A

- 12 Table 9

- A.5.1 Change in Price Elasticity of Demand for A utomobiles following a Purchase Price Change

................................ ................................ ............. 9

- A

- 12

9

- A

- iTable 9

- A.5.2 Change in Relative Price Elasticity for Home Appliances followin g a Purchase Price Change

................................ ................................ ............. 9

- A

- 13

LIST OF FIGURE
Figure 9

- A.3.1 Trends in Appliance Shipment, Housing Starts and Replacements

........... 9

- A

- 4 Figure 9

- A.4.1 Residual Shipments and Appliance Price

................................ .................. 9

- A

- 6

9

- A

- iiAPPENDIX 9

- A. R ELATIVE P RICE E LASTICITY OF D EMAND FOR A PPLIANCE S

9

- A.1 INTRODUCTION This appendix summarizes the U.S. Department of Energy’s ( DOE’s ) study of the price elasticity of demand for home appliances, including refrigerators, clothes washers and dishwashers. DOE chose t his particular set of appliances because of the availability of data to determine a price elasticity. Section 9

- A.2 review s the existing economics literature describing the impact of economic variables on the sa le of durable goods. Section 9

- A.3 describes the market for home appliances and the changes that have occurred over the past 20 years . In section 9

- A.4 , D OE summarizes the results of its regression analysis and present s estimates of the price elasticity of demand for the three appliances. In section 9

- A.5, DOE presents its development of

an “ effective ” purchase price elasticity. DOE’s interpretation of its re sults is presented in section 9

- A.6

. Finally, section 9

- A.7 describes the data used in DOE’s analysis.

9

- A.2 LITERATURE REVIEW

R elatively few studies measur e the impact of price, income and efficiency on the sale of household appliances. T his section briefly review s the literature that describes the likely importance of these variables on the purchase of household appliances

.

9

- A.2.1 Price
DOE review s many studies that seek to measure the impact of price on sales in a dynamic market. One study of the automobile mark et prior to 1970 finds the price elasticity of demand to decline over time. The author explains this as the result of buyers delaying purchases after a price increase but eventua lly making the purchase ( Table 9

- A.2

. 1 ). 1 A contrasting study of household white goods , also prior to 1970, finds the elasticity of demand to increase over time as more price

- conscious buyers enter the market. 2 A n analysis of refrigerator market survey data finds that consumer purchase probability decreases with survey asking price. 3 Estimates of the price elasticity of demand for different brands of the same equipment tend to vary. A review of 41 studies of the impact of price on market share found the average price elasticity to be

- 1.75. 4 The average estimate of price elasticity of demand reported in these studies is

- 0 .33 in the appliance market and

- 0 .47 in the combined automobile and appliance markets.

9

- A.2.2 Income Higher income households are more li kely to own household appliance s

. 5 Th e impact of income on appliance shipments is explored in two econometric studies of the automobile and appliance markets. 1 , 2 The average income elasticity of demand is 0 .50 in the appliance study cited in the literature review, much larger in the automobile study ( Table 9

- A.2

. 1 ).

9

- A

- 19

- A.2.3 Appliance Efficiency and Discount Rates Many studies estima te the impact of appliance efficiency on consumer s’ choice of appliance. Typically, this impact is summarized by the implicit discount rate ; that is , the rate consumers use to compare future savings in appliance operating costs against a higher initial purchase price of a n appliance. One early and much cited study co ncludes that consumers use a 20

- percent implicit discount rate when purchasin g room air conditioners ( Table 9

- A.2 .1 ). 6 A survey of several studies of different appliances suggests that the consumer implicit discount rate has a broad range and averages about 37

- percent

. 7

Table 9

- A.2

. 1 Estimates of the Impact of Price, Income and Efficiency on Automobile and Appliance Sales

Durable Good Price Elasticity Income Elasticity Brand Price Elasticity Implicit Discount

Rate Model Data Years Time Period

Automobiles 1

- 1.07 3.08

- - Linear Regression, stock adjustment - Short run

Automobiles 1

- 0.36 1.02

- - Linear Regression, stock adjustment - Long run Clothes Dryers 2

- 0.14 0.26

- - Cobb

- Douglas, diffusion 1947

- 1961 Mixed Room Air Conditioners 2 - 0.37 8 0.45

- - Cobb

- Douglas, diffusion 1946

- 1962 Mixed

Dishwashers 2

- 0.42 0.79

- - Cobb

- Douglas, diffusion 1947

- 1968 Mixed Refrigerators 3

- 0.37

- - 39% Logit probability, survey data 1997 Short run

Various 4

- - - 1.76 9

- Multiplicative regression

- Mixed Room Air Conditioners 5 - - - 1.72

- Non

- linear diffusion 1949

- 1961 Short run Clothes Dryers 5

- - - 1.32

- Non

- linear diffusion 1963

- 1970 Short run Room Air Conditioners 6 - - - 20% Qualitative choice, survey data - - Household Appliances 7 - - - 37% 1 0 Assorted

- -
Sources: 1 S. Hymens. 1971; 2 P. Golder and G. Tellis, 1998; 3 D. Revelt and K. Train, 1997; 3

4 G. Tellis, 1988; 5 D. Jain and R. Rao , 1979 ; 6 J. Hausman , 1985 ; 7 K. Train, 1985. 8

Notes: 8 Logit probability results are not directly comparable to other elasticity estimates in this table. 9 Average brand price elasticity across 41 studies. 10 Averaged across several household appliance studies referenced in this work.

9

- A.3 VARIABLES DESCRIBING THE MARKET FOR REFRI GERATORS, CLOTHES WASHERS, AND DISHWASHERS
In this section DOE evaluate s variables that appear to account for refrigerator, clothes washer and dishwasher shipments, including physical household and appliance variables and economic variables.

9

- A

- 29

- A.3.1 Physical Household/Appliance Variables

Seve ral variables influence the sale of refrigerators, clothes washers and dishwashers. The most important for explaining appliance sales trends are the annual number of new households formed (housing starts) and the number of appliances reaching the end of th eir operating life (replacements). Housing starts influence sales because new homes are often provided with, or soon receive, new appliances, including dishwashers and refrigerators. Replacements are correlated with sales because new appliances are typical ly purchased when old ones wear out. In principle, if households maintain a fixed number of appliances, shipments should equal housing starts plus appliance replacements.

9

- A.3.2 Economic variables Appliance price, appliance operating cost and household income a re important economic variables affecting shipments. Low prices and costs encourage household appliance purchases and a rise in income increases householder ability to purchase appliances. In principle, changes in economic variables should explain changes in the number of appliances per household.
During a 1980

– 2002 study p eriod, annual shipments grew 69 percent for clothes washers, 81 percent for refrigerators a nd 105 percent for dishwashers ( Table 9

- A.3

. 1 ). This rising shipments trend is explained in part by housing starts, which increased 6

- percent and by appliance repl acements, which rose between 49

- percent and 90

- percent, depending on the appliance, over the per iod ( Table 9

- A.3

. 1 ). a For mature markets such as these, replacements exceed appliance sales associated with new housing construction.

Table 9

- A.3

. 1 Physical House hold/Appliance Variables Shipments i (millions) Housing Starts ii (millions) Replacements iii (millions) Appliance 1980 2002 Change 1980 2002 Change 1980 2002 Change Refrigerators 5.124 9.264 81% 1.723 1.822 6% 3.93 5.84 49% Clothes Washers 4.426 7.492 69% 1.723 1.822 6% 3.66 5.50 50% Dishwashers 2.738 5.605 105% 1.723 1.822 6% 1.99 3.79 90%
i Shipments: Number of units sold. Sources: AHAM Fact Book and Appliance Magazine.
ii Housing Starts: Annual number of new homes constructed. Source: U.S. Census.
iii Replacements: Average of annual lagged shipments, with lag equal to expected appliance operating life, ± 5 years.

S hipments increased somewhat more rapidly than housing starts and replacements. This is shown by comparing the beginning and end points of lines that represent “starts plus replacements” (uppermost solid line in Figure 9

- A.3

. 1 ) and “shipment s” (diamond linked line in Figure 9

- A.3

. 1 ). In 1980 the “shipment” line begins below the “starts plus replacements” line. In 2002, the “shipments” line ends above the “starts plus replacements” line. This more rapid

a Appliance replacements are determined from the expec ted operating life of refrigerators (19 years), clothes washers (14 years), and dishwashers (12 years) and from past shipments. Replacements are further discussed in section 9

- A.3. The dishwasher lifetime used in this analysis does not match the dishwasher used in the primary analysis. 9

- A

- 3increase in shipments, compared to housing starts plus replacements, suggests that the appliance per household ratio increased over the study period.

Figure 9

- A.3

. 1 Trends in Appliance Shipment, Housing Starts and Replacements
Economic variables, including price, cost and income, may explain this increase in appliances per household. Over the period , appliance prices decreased 40

- percent to 50

- percent , operating costs fell between 33

- percent and 72

- percent, and me dian household income rose 16

- percent ( Table 9

- A.3

. 2 ).

Table 9

- A.3

. 2 Economic Variables Price i (1999$) Operating Cost ii (1999$) Household Income iii (1999$) Appliance 1980 2002 Change 1980 2002 Change 1980 2002 Change Refrigerators 1208 726

- 40% 333 94

- 72% 37,447 43,381 16% Clothes Washers 779 392

- 50% 262 175

- 33% 37,447 43,381 16% Dishwashers 713 369

- 48% 183 95

- 48% 37,447 43,381 16%
i Price: Shipment weighted retail sales price. Sources: AHAM Fact Book and Appliance Magazine.
ii Operating Cost: Annual electricity price times electricity consumption. Source: AHAM Fact Book.
iii Income: Mean Household income. Source: U.S. Census.

9

- A.4 REGRESSION ANALYSIS OF VARIABLES AFFECTI NG APPLIANCE SHIPMENTS

Few data are available to estimat e the impact of economic variables on the demand for appliances. Industry operating cost data is incomplete

— appliance energy use data are available for only 12 years of the 1980

- 2002 study period. Industry price data are also incomplete

— available for only 8 years of the study period for each of the appliances.
The lack of data suggests that regression analysis can at best evaluate broad data trends, utilizing relatively few explanatory variables. This section begin s by describing broad trends apparent in the economic and physical household data sets and then specifies a simple regression Refrigerator Shipments

0 1 2 3 4 5 6 7 8 9 10

1980 1984 1988 1992 1996 2000Millions New Housing
Retirements Shipments Clothes Washer Shipments

0 1 2 3 4 5 6 7 8

1980 1984 1988 1992 1996 2000Millions Dishwasher Shipments

0 1 2 3 4 5 6

1980 1984 1988 1992 1996 2000Millions

9

- A

- 4model to measure these trends, making assumptions t o minimize the number of explanatory variables. Finally, results of the regression analysis are presented along with an estimate of the price elasticity of demand for appliances. In section 9

- A.4.5 , DOE present s the results of regression analysis performed with more complex models, which are used to test assumptions underlying the simple model. These results support the specification of the simple model and the pric e elasticity of appliance demand estimated with that model.

9

- A.4.1 Broad Trends
In this section DOE review s trends in the physical household and economic data sets and posit s a simple approach for estimating the price elasticity of appliance demand. As noted ab ove, the physical household variables ( housing starts and appliance replacements) explain most of the variability in appliance shipments during the study period (1980

- 2002)

. b DOE assume s the rest of the variability in shipments ( referred to as “ residual sh ipments ” ) is explained by economic variables . Below, DOE present s a tabular method for measuring price elasticities.
To illustrate this tabular approach, DOE define s two new variables

— residual shipments and total price. Residual shipments are defined as the difference between shipments and physical household demand (starts plus replacements). Total price , represented by the following equation, is defined as appliance price plus the present value of lifetime appliance operating cost : c



### PVOC PP TP + = Eq. 9

- A

. 1 W here:

TP = t otal price, PP = a ppliance purchase price, and PVOC = p resent value of operating cost.
Over the study period, residual shipments increased in proportion to total shipments by 30

- percent for refrigerators, 19

- percent for clothes washers , a nd 23

- percent for dishwashers. At the sam e time, total prices declined 47

- percent, 45

- percent and 48

- percent for refrigerators, clothes washers , and dishwashers, respectively. Assuming that total price explains the entire change in per household appliance usage, a rough estimate is calculated of the total price elasticity of demand equal to

- 0 .48 for refrigerators,

- 0 .32 for clothes washers a nd

- 0 .37 for dishwashers ( Table 9

- A.4

. 1 ).

b A log regression of the form: Shipments = a + b • Housing Starts + c • Retirements, indicates that these two variables explain 89

- percent of the variation in refrigerator shipments, 97

- percent of the variation in clothes w asher shipments, and 97

- percent of the variation in dishwasher shipments.

c Present value operating cost is calculated assuming a 19

- year operating life for refrigerators, 14

- year operating life for clothes washers, and a 12

- year operating life for dishwas hers. A 37 percent discount rate is used to sum annual operating costs into a present value operating cost. 9

- A

- 5Table 9

- A.4

. 1 Estimate of Total Price Elasticity of Demand Residual Shipments (millions) Total Price (199 9 $) Elasticity Appliance 1980 2002 Difference Change 1980 2002 Change Refrigerators

- 0.5 1.6 2.1 30% 1541 820

- 61%

- 0.48 Clothes Washers

- 1.0 0.2 1.1 19% 1042 567

- 59%

- 0.32 Dishwashers

- 1.0

- 0.01 1.0 23% 896 464

- 64%

- 0.37
The negative correlation , between total price and residual shipments suggested by these negative price elasticities , is illustrated in a graph of residual shipments on the y

- axis and to tal price on the x

- axis ( Figure 9

- A.3

. 1 ).

Yellow points are observed price data; red points are interpolated price data. Figure 9

- A.4.1 Residual Shipments and Appliance Price
Household income rose during the study period, making it easier for households to purchase appliances. Assuming that a rise in income has a similar impact on shipments as a decline in price, the impact of income is incorporated by defining a third variable, termed relative price, which is calculated as total price divi ded by household income and represented by the following equation. d

Income TP RP = Eq. 9

- A

. 2 W here:

R P = r elative price, T

P = t otal price, and Income = h ousehold income.

d Recall that the income elasticity of demand cited in the literature review is 0.50 and the price elasticity of demand cited in the review averages

- 0.35. This suggests that combining the effects of income and price will yield an elasticity less negative than price elasticity alone. Refrigerators

400 800 1200 1600 2000

-2.0 -1.0 0.0 1.0 2.0
Total PriceResidual Shipments Clothes Washers

400 600 800 1000 1200

-1.5 -1.0 -0.5 0.0 0.5
Total PriceResidual Shipments Dishwashers

200 400 600 800 1000

-2.0 -1.5 -1.0 -0.5 0.0 0.5
Total PriceResidual Shipments

9

- A

- 6The percent decline in relative price for the three appliances divided by the percent decline in residual shipments suggests a rough estimate of relative price elasticity equal to

- 0 .40 for refrigerators,

- 0 .26 for clothes washers a nd

- 0.30 for dishwashers ( Table 9

- A.4

. 2 ).

Table 9

- A.4

. 2 Tabular Estimate of Relative Price Elasticity of Appliance Demand Residual Shipments (millions) Relative Price (1999$) Elasticity Appliance 1980 2002 Change 1980 2002 Change Refrigerators

- 0.532 1.597 30% 0.041 0.019

- 74%

- 0.40 Clothes Washers

- 0.953 0.174 19% 0.028 0.013

- 72%

- 0.26 Dishwashers

- 0.974

- 0.005 23% 0.024 0.011

- 76%

- 0.30

9

- A.4.2 Specification of Model The limited price data suggest it is appropriate to us e a simple regression model to estimate the impact of economic variables on shipments, using few explanatory variables. The following equation , chosen for this analysis , includes one physical hous ehold variable ( housing starts plus replacements) and one relative price variable (the sum of purchase price plus ope rating cost, divided by income). 

## [ ] Rplc Starts c RP b a Ship + × + × + = Eq. 9

- A

. 3 W here:
Ship = q uantity of appliance sold, R P = r elative price, Starts = n umber of new homes, and Rplc = n umber of appliances at the end of their operating life.
The natural logs are taken of all variables so that the estimated coefficients for each variable in the model may be interpreted as the percent change in shipments associated with the percent change in the variable. Thus, the coefficient b in this model is interpreted as the relative price elasticity of demand for the three appliances.

DOE use s the following combined regression equation to estimate an average price elasticity of demand across the three appliances, using pool ed data in a single regression. A combined regression specification is justified, given the limited data availab le and the similarity in price and shipment behavior across appliances ( see Figure 9

- A.4.1 ). Thus, the model represented by the combined regression equation is considered the basic model in DOE’s analysis of appliance shipments. 

## [ ] DW e CW d Rplc Starts c RP b a Ship × + × + + × + × + = Eq. 9

- A

. 4

W here:

9

- A

- 7CW = q uantity of clothes washers sold, and DW = quantit y of dishwashers sold.

9

- A.4.3 Discussion of Model The most important assumption used to specify this model is that changes in economic variables over the study period

— income, price , and operating cost

— are responsible for all observed growth in residual appliance shipments. In other words, DOE assume s no impact from other possible factors , such as changing consumer preferences or increases in the quality of appliances. This assu mption seems unlikely , but without additional data, the impact of this assumption on the price elasticity of demand cannot be measured. DOE effectively assume s that changes in consumer preferences and appliance characteristics, while affecting which models are purchased, have relatively little impact on the total number of appliances purchased in a year.
Three additional assumptions used to specify this model deserve comment. The relative price variable is specified in the model, assuming that (1) the cor rect implicit discount rate is used to combine appliance price and operating cost and that (2) rising income has the same impact on shipments as falling total price. The “ starts + replacements ” variable is specified, assuming (3) that starts and replacemen ts have similar impacts on shipments.
To investigate the first assumption about discount rates, DOE calculate s “present v alue operating cost” using a 20

- percent implicit discount rate and performed a second regression analysis based on the models described in E quations 9

- A.1 and 9

- A.2. The results of this analysis, presented in section 9

- A.4.5 , indicate that the elasticity of relative price is fairly insensitive to changes in the discount rate.
To investigate the second and third assumptions, DOE specifie s a regression model separating income from total price and replacements from starts, th ereby adding two additional explanatory variables to the basic mo del as shown in the following equation:

DW g CW f Rplc e Start d Incone c TP b a Ship × + × + × + × + × + × + = Eq. 9

- A

. 5
The results of the regression analysis of this model are presented in secti on 9

- A.4.5

. These results suggest that the elasticity of total price (coefficient b ) is relatively insensitive to changes i n the treatment of income and “starts + r eplacements ” in the model.

9

- A.4.4 Analysis Results The following sections describe results of analyses using both the individual and combined models for appliances and the effects of a lower consumer discount rate and disaggregated variables.

9

- A

- 89

- A.4.4.1 Individual Appliance Model The individual appliance regression eq uations are specified in the following equation. 

## [ ] Rplc Starts c RP b a Ship + × + × + = Eq. 9

- A

. 6

In the regression analysis of this model, the elasticity of relative pr ice ( b ) is estimated to be

- 0 .4 0 for refrigerators,

- 0 .31 for clothes washers and

- 0 .32 for dishwashers ( Table 9

- A.4

. 3 ), averaging

- 0 .35. These elasticities are similar to those reported in the literatur e survey for appliances ( Table 9

- A.2

. 1 ). They are remarkably similar to the price elasticity calculated using a tabular a pproach ( Table 9

- A.4

. 2 ).

The estimated coefficient associated with the “s tarts + r eplacements ” variable is close to

one. A coefficient equal to one for this varia ble would imply that, holding economic variables constant , shipments increase in direct proportion to an increase in “s tarts + r eplacements. ” The high R

- squared values (above 95) and t

- statistics (above 5) in the results provide a measure of confidence in this analysis, despite the very small data set.

Table 9

- A.4

. 3 Individual Appliance Model Results Refrigerator Clothes Washer Dishwasher Variable Coefficient t

- stat Coefficient t

- stat Coefficient t

- stat Intercept

- 1.51

- 7.26

- 1.47

- 8.23

- 2.08

- 16.78 Relative Price

- 0.40

- 6.60

- 0.31

- 5.69

- 0.32

- 7.03 Starts + Replacements 1.05 5.90 1.08 6.41 1.35 11.46 R 2 0.954 0.954 0.975 Observations 23 23 23

9

- A.4.4.2 Combined Appliance Model The combined appliance regression equation is specified in the following equation. 

## [ ] DW e CW d Rplc Starts c RP b a Ship × + × + + × + × + = Eq. 9

- A

. 7

This regression analysis indicates that the model fits the existing shipments data well (hi gh R

- squared) and that the variables included in the model are st atistically significant ( Table 9

- A.4

. 4 ). Estimated with this model, t he elasticity of relative price is

- 0 .34, close to the average value estimated in the individual appliance models (

- 0 .35). It is also similar to elasticity estim ates reported in the literature survey and calculated using the tabular approach in Table 9

- A.4

. 2

.

9

- A

- 9Table 9

- A.4

. 4 Combi ned Appliance Model Result Variable Coefficient t

- statistic Intercept

- 1.60

- 15.54 Relative Price

- 0.34

- 10.74 Starts + Replacements 1.21 13.95 CW

- 0.20

- 9.04 DW

- 0.32

- 6.58 R 2 0.983 Observations 69

9

- A.4.5 Additional Regression Specifications and Results
As described in section 9

- A.4.3 , DOE use s three assumptions to specify its appliance models. The first, made to aggregate appliance price and operating cost , is that the implicit price variable in the basic regressio n model is specified using a 37

- percent implicit discount rate. The second states that the implicit price variable is defined assuming that rising income has the same impact on shipments as falling tot al price. The third states that the “s tarts + r eplacements ” variable is defined assuming that housing starts have a similar impact on shipments as appliance replacements.

9

- A.4.5.1 Lower Consumer Discount Rate To investigate the first assumption about discount rates, DOE calculate s “present value operating cost” using a 20

- percent implicit discount rate and performed a second regression analysis based on the models described in Eq uation 9

- A

. 1 and Eq uation 9

- A

. 2

. The estimated coefficient associated with the relative price variable in the se regressions is almost identical to the coefficients estimated for the same variable based on a 37

- percent implicit discount rate. The elasticity of relative price calculated using a 20

- percent discount rate is

- 0 .33 in the c ombined regression and averag es

- 0 .35 f or the three appliances ( Table 9

- A.4

. 5 ). The elasticity o f price calculated using a 37

- percent discount rate is

- 0 .34 in the combined regression and averages

- 0.35 for the three appliances. DOE conclude s from this analysis that th e elasticity of relative price is fairly insensitive to changes in the discount rate.

9

- A

- 10Table 9

- A.4

. 5 Combined and Individual Results, 20

- percent discount rate

9

- A.4.5.2 Disaggregated Variables To investigate the sec ond and third assumptions, DOE construct s a regression model that separat es income from total price and replacements from starts, thus adding two additional explanatory variables to the basic model ( as shown earlier as Eq. 9

- A

. 4 and shown below ).

DW g CW f Rplc e Start d Income c TP b a Ship × + × + × + × + × + × + =
The estimated coefficient associated with the total price variable in these regressions is almost identical to the coefficients estimated for the r elative price variable reported above. The elasticity of total price in the above equation is

- 0 .36 in the combined appliance regression and averages

- 0 .35 f or the three appliances ( Table 9

- A.4

. 6 ). The elasticity of relative price based on the model described in Equation 9

- A

. 2 is

- 0 .34 in the combined regression ( Table 9

- A.4

. 4 ) and averages

- 0 .35 across t he individual appliance s ( Table 9

- A.4

. 3 ). DOE conclude s that the price elasticity calculated in this analysis is relatively insensitive to the specifi cation of household income and “s tarts + r eplacements ” variables in the model. Three Appliances Variable Coefficient t-Stat Intercept -1.53 -14.61 Total Price / Income -0.33 -10.69 Starts + Retirements 1.20 13.65 CW -0.18 -8.69 DW -0.32 -6.57

R 2 0.982 Observations 69
Refrigerator Clothes Washers Dishwasher Variable Coefficient t-Stat Coefficient t-Stat Coefficient t-Stat Intercept -1.36 -6.26 -1.41 -7.49 -2.04 -17.23 Total Price / Income -0.38 -6.50 -0.32 -5.29 -0.33 -7.30 Starts + Retirements 1.04 5.73 1.06 5.83 1.34 11.64

R 2 0.953 0.950 0.977 Observations 23 23 23

9

- A

- 11Table 9

- A.4

. 6 Disaggregated Regression Results, 37 percent discount rate

9

- A.5 L ONG RUN IMPACTS
As noted above in Table 9

- A.2

. 1 , the literature review provides price elasticities over short and long time periods, also referred to as short

- run and long

- run price elasticities. As noted in the first two rows of Table 9

- A.2

. 1 , one source ( i.e. , Hymans) shows that the price elasticity of demand is significantly different over the short run and long run for automobiles. 1 Because DOE’s f orecasts of shipments and national impacts due to standards is over a 30

- year time period, consideration must be given to how the relative price elasticity is affected once a new standard takes effect.

DOE considers the relative price elasticities determined above in section 9

- A.4 to be short

- run elasticities . DOE was unable to identify sources specific to household durable goods, such as appliances, to indicate how short run and long run price elasticities differ. Therefore, to estimate how the relative price elasticity changes over time, DOE relie s on the Hy mans study pertaining to automobiles. Based on the Hymans study, Table 9

- A.5

. 1 shows how the automobile price elasticity of demand changes in the years following a pu rchase price change. With increasing years after the price change, the price elasticity becomes more inelastic until it reaches a terminal value around the tenth year after the price change.

Table 9

- A.5

. 1 Cha nge in Price Elasticity of Demand for Automobiles following a Purchase Price Change Years Following Price Change 1 2 3 5 10 20 Price Elasticity of Demand

- 1.20

- 0.93

- 0.75

- 0.55

- 0.42

- 0.40 Relative Change in Elasticity to 1 st year 1.00 0.78 0.63 0.46 0.35 0.33

Source: Hymans, 1971. Three Appliances Variable Coefficient t-Stat Intercept -2.92 -1.26 Income 0.58 2.92 Total Price -0.36 -7.06 Housing Starts 0.44 10.02 Retirements 0.62 8.12 CW -0.24 -9.25 DW -0.46 -7.68

R 2 0.985 Observations 69
Refrigerator Clothes Washers Dishwasher Variable Coefficient t-Stat Coefficient t-Stat Coefficient t-Stat Intercept -6.19 -2.24 -6.64 -1.63 1.00 0.23 Income 0.89 3.80 0.87 2.31 0.20 0.52 Total Price -0.35 -5.48 -0.27 -2.51 -0.43 -5.18 Housing Starts 0.41 7.38 0.25 3.29 0.62 8.24 Retirements 0.56 6.06 0.56 2.09 0.65 5.86

R 2 0.984 0.958 0.979 Observations 23 23 23

9

- A

- 12Based on the relative change in the automobile price elasticity of demand shown in Table 9

- A.5

. 1 , DOE develop s a time series of re lative price elasticities for home appliances. Table 9

- A.5

. 2 presents the time series.

Table 9

- A.5

. 2 Change in Relative Price Elasticity for Home Appliances following a Purchase Price Change Years Following Price Change 1 2 3 5 10 20 Relative Change in Elasticity to 1 st year 1.00 0.78 0.63 0.46 0.35 0.33
Relative Price Elasticity

- 0.34

- 0.26

- 0.21

- 0.16

- 0.12

- 0.11

9

- A.6 S UMMARY This appendix describes the results of a literature search, tabular analysis , and regression analys e s of the impact of price and other variables on appliance shipments. In the literature, DOE f ound only a few studies of appliance markets th at are relevant to this analysis and no studies after 1980 using time series price and shipments data. The information that can be summarized from the literature suggests that the demand for appliances is price inelastic. Other information in the literatur e suggests that appliances are a normal good, such that rising incomes increase the demand for appliances. Finally, the literature suggests that consumers use relatively high implicit discount rates, when comparing appliance prices and appliance operating costs.

There are too few price and operating cost data available to perform complex analysis of dynamic changes in the appliance market. In this analysis, DOE use s data available for refrigerators, clothes washers , and dishwashers to evaluate broad mark et trends and perform simple regression analysis.

These data indicate an increase in appliance shipments and a decline in appliance price and operating cost over the study period 1980

‒ 2002

. Household income has also risen during this time. To simplify t he analysis, DOE combine s the available economic information into one variable, termed relative price, and used th at variable in a tabular analysis of market trends and a regression analysis.

DOE’s tabular analysis of trends in the number of appliances p er household suggests that the price elasticity of demand for the three appliances is inelastic. Its regression analysis of these same variables suggests that the relative price elasticity of demand is

- 0.34

. The price elasticity is consistent with estimates in the literature. Nevertheless, DOE stress es that the measure is based on a small data set, using very simple statistical analysis. More important ly , the measure is based on an assumption that economic va riables, including price, income and operating costs, explain most of the trend in appliances per household in the United States since 1980. Changes in appliance quality and consumer preferences may have occurred during this period, but they are not accoun ted for in this analysis.
9

- A

- 139

- A.7 DATA USED IN THE ANA LYSIS

• Appliance Shipments are defined as the annual number of units shipped in millions. These data were collected from the Association of Home Appliance Manufacturers ( AHAM ) and Appliance Magazine as annual values for each year, 1980

– 2002. 9 , 10
, 11 AHAM was used for the period 1989

– 2002 while Appliance Magazine was used for the period 1980

– 1988.

• Appliance Price is defined as the shipments weighted retail sales price of the unit in 1999 dollars. Price values fo r 1980, 1985, 1986, 1991, 1993, 1994, 1998 , and 2002 were collected from AHAM Fact B ook s. 12 Price values for other years were interpolated from these eight years of data.

• Housing Starts data were collected from the U.S. Census construction statistics (C25 reports) as annual values for each year, 1980

– 2002. 13

• Replacements , driven by equipment retirements, are estimated with the assumption that some fraction of sales arise from consumers replacing equipment at the end of its useful life. Since each appliance has a different expected lifespan (19 years for refrigerators, 14 years for clothes washers, and 12 years for dishwashers ) , replacements are calculated differently for each appliance type

. 14
, 15
, 16 Replacements are estimated as the average of shipments 14

– 24 years previous for re frigerators, 9

– 19 years prev ious for clothes washers, and 7

– 17 years previous for dishwashers. Historical shipments data were collected from AHAM and Appliance Magazine.

• Annual Electricity Consumption ( A EC ) is defined as the energy consumption of the unit in kilowatt

- hours. Electricity consumption depend s on appliance capacity and efficiency. These data were provided by AHAM for 1980, 1990

– 1997 and 1999

– 2002. 10 Data were interpolated in the years for which data were not available.

• Operating Cost is the present value of the electricity consumption of an appliance over its expected lifespan. The lifespans of refrigerators, clothes washers and dishwashers are assumed to be 19, 14, and 12 years resp ectively. Discount rates of 20

- percent and 37

- percent were used, producing similar estimates of price elasticity

. 6 , 17 A study by Hausman recommend ed a discount rate of “about 20

- percent ” in its introduction and pres ented results ranging from 2 4.1

- percent to 29

- percent , based on his calculations for room air conditioners. A study by Train suggests a range of impli cit discount rates averaging 35

- percent for appliances.

• Income : Median annual household income is in in 2003 dollars. Th ese data w ere collected for each year, 1980

– 2002, from Table H

- 6 of the U.S. Census

. 18

9

- A

- 14REFERENCES

1. Hymans, S., Consumer Durable Spending: Explanation and Prediction

. Brookings Papers on Economic Activity , 1971. 1971(1): pp. 234

- 239

2. Golder, P. N. and G. J. Tellis, Beyond Diffusion: An Affordability Model of the Growth of New Consumer Durables

. Journal of Forecasting , 1998. 17

3. D. Revelt and K. Train, Mixed Logit with Repeated Choices: Household's Choice of Appliance Efficiency Lev el

. Review of Economics and Statistics , 1997

4. Tellis, G., The Price Elasticity of Selective Demand: A Meta

- Analysis of Econometric Models of Sales

. Journal of Marketing Research , 1988

5. U.S. Department of Energy

- Energy Information Agency, The Effect of Income on Appliances in U.S. Households , 2002. Washington, DC.
< http://www.eia.doe.gov/emeu/recs/appliances/appliances.html >

6. Hausman, J., Individual discount rates and the purchase and utilization of energy using durables

. The Bell Journal of Economics , 1979

7. Train, K., Discount Rates in Consumers' Energy

- Related Decisions

. Energy: The International Journal , 1985. 10(12)

8. Train, K., Discount Rates in Consumers' Energy

- Related Decisions

. Energy: The International Journal , 1985. 10(12): pp. 1243

- 1253

9. Association of Home Appliance Manufacturers, AHAM 2000 Fact Book . 2000. Washington, DC.

10. Association of Home Appliance Manufacturers, AHAM 2003 Fact Book . 2003. Wash ington, DC.

11. Statistical Review

. Appliance Magazine , April, 1990

12. Association of Home Appliance Manufacturers, AHAM Fact Books , 1987, 1988, 1993, 1995, 2000, and 2003. Washington, DC.

13. U.S. Census Bureau, Current Construction Reports, C25

– Ne w One

- Family Houses Sold . Washington, DC. < http://www.census.gov/prod/www/abs/c25.html >

14. Duemling, R., Energy and Resources Group, University of California. Berkeley, 1999.

15. U.S. Departm ent of Energy

- Office of Building Research and Standards, Final Rule Technical Support Document (TSD): Energy Efficiency Standards for Consumer

9

- A

- 15Products: Clothes Washers , 2000. U.S. Department of Energy. Washington, DC. Report No. LBNL

- 47462.
< http://www.eren.doe.gov/buildings/codes_standards/reports/cwtsd/index.html >

16. U.S. Department of Energy

- Office of Codes and Standards, Technical Support Document: Energy Conse rvation Standards for Consumer Products: Dishwashers, Clothes Washers, and Clothes Dryers including: Environmental Impacts, Regulatory Impact Analysis, December, 1990. Washington, DC. Report No. DOE/CE

- 0299P.
< http:/ /papyrus.lbl.gov/ >

17. K.E. Train and T. Atherton, Rebates, loans, and customers’ choice of appliance efficiency level: combining stated

- and revealed

- preference data

. The Energy Journal , 1995

18. U.S. Census Bureau, Income, Historical Income Tables

– Households, Table H

- 6

. Washington, DC. < http://www.census.gov/hhes/www/income/histinc/inchhtoc.html >

9

- A

- 16