9 A

- i APPENDIX 9A. RELATIVE PRICE ELAST ICITY OF DEMAND FOR

APPLIANCE S

TABLE OF CO NTENTS

9A.1 INTRODUCTION

................................ ................................ ................................ .. 9A

- 1

9A.2 LITERATURE REVIEW

................................ ................................ ....................... 9A

- 1

9A.2.1 Price

................................ ................................ ................................ ........................ 9A

- 1

9A.2.2 Income

................................ ................................ ................................ ..................... 9A

- 1

9A.2.3 Appliance Efficiency and Discount Rates

................................ .............................. 9A

- 2

9A.3 VARIABLES DESCRIBING THE MARKET FOR REFRI GERATORS, CLOTHES WASHERS, AND DISHWASHERS

................................ .................. 9A

- 2

9A.3.4 Physical Household/Appliance Variables

................................ ............................... 9A

- 3

9A.3.5 Economic variables

................................ ................................ ................................ . 9A

- 3

9A.4 REGRESSION ANALYSIS OF VARIABLES AFFECTI NG APPLIANCE

SHIPMENTS

................................ ................................ ................................ .......... 9A

- 4

9A.4.1 Broad Trends

................................ ................................ ................................ ........... 9A

- 5

9A.4.2 Specification of Model

................................ ................................ ............................ 9A

- 7

9A.4.3 Discussion of Model

................................ ................................ ............................... 9A

- 8

9A.4.4 Analysis Results

................................ ................................ ................................ ...... 9A

- 8

9A.4.4.1 Individual Appliance Model

................................ ................................ . 9A

- 8

9A.4.4.2 Combined Appliance M odel

................................ ................................ . 9A

- 9

9A.4.5 Additional Regression Specifications and Results

................................ ............... 9A

- 10

9A.4.5.1 Lower Consumer Discount Rate

................................ ......................... 9A

- 10

9A.4.5.2 Disaggregated Variables

................................ ................................ ..... 9A

- 11

9A.5 LONG RUN IMPACTS

................................ ................................ ........................ 9A

- 11

9A.6 SUMMARY

................................ ................................ ................................ .......... 9A

- 12

9A.7 DATA USED IN THE ANA LYSIS

................................ ................................ ..... 9A

- 13

LIST OF TABLES

Table 9A.2.1 Estimates of the Impact of Price, Income and Efficiency on Automobile and Appliance Sales

................................ ................................ 9A

- 2

Table 9A.3.1 Physical Household/Appliance Variables

................................ ................... 9A

- 3

Table 9A.3.2 Economic Variables

................................ ................................ .................... 9A

- 4

Table 9A.4.1 Estimate of Total P rice Elasticity of Demand

................................ ............. 9A

- 6

Table 9A.4.2 Tabular Estimate of Relative Price Elasticity of Appliance Demand

......... 9A

- 7

Table 9A.4.3 Individual Appliance Model Results

................................ .......................... 9A

- 9

Table 9A.4.4 Combined Appliance Model Result

................................ ............................ 9A

- 9

Table 9A.4.5 Combined and In dividual Results, 20 percent discount rate

..................... 9A

- 10

Table 9A.4.6 Disaggregated Regression Results, 37 percent discount rate

.................... 9A

- 11

Table 9A.5.1 Change in Price Elasticity of Demand for Automobiles following a Purchase Price Change

................................ ................................ .............. 9A

- 129 A

- ii Table 9A.5.2 Change in Relative Price Elasticity for Home Appliances following a Purchase Price Change

................................ ................................ .............. 9A

- 12

LIST OF FIGURE

Figure 9A.3.1 Trends in Appliance Shipment, Housing Starts and Replacements

............ 9A

- 4 Figure 9A.4.1 Residual Shipments and Appliance Price

................................ ................... 9 A

- 69A

- 1 APPENDIX 9A. RELATIVE PRICE ELAST ICITY OF DEMAND FOR APPLIANCES

9A.1 INTRODUCTION

This appendix summarizes DOE’s study of the price elastic ity 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 litera ture describing the impact of economic variables on the sa le of durable goods

. S ection 9A .3 describes the market for home appliances and the changes that

have occurred over the past 20 years . In s ection 9A .4

, DOE summarize s the results of its regression analysis and present s estimates of the price elasticity of demand for the three appliances. In section 9A.5, DOE presents development of an ‘effective’ purchase price elasticity. DOE’s interpretation of its re sults is presented in s ection 9A .6

. Finally, section 9A.7 describes the data used in DOE’s analysis.

9A.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 t he likely importance of these variables on the purchase of household appliances

.

9A.2.1 Price

DOE reviewed many studies that sought to measure the impact of price on sales in a dynamic market. One study of the automobile market 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 9A.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 product 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

9A.2.2 Income The

aver age 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.

Higher income households are more likely to own household appliances. 5 The 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 (Tab le 9.A.2.1 ).9A

- 2 9A.2.3 Appliance Efficiency and Discount Rates

Many studies estimate 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 9A.2.1 ). 6 A

su rvey of several studies of different appliances suggests that the consumer implicit discount rate has a broad range and averages about 37 percent

. 7

Table 9A.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;

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

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.

9A.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/appliance variables and

economic variables.9A

- 3 9A.3.4 Physical Household/Appliance Variables

Several variables influence the sale of refrigerat ors, 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 their operating life (replacements). Housing sta rts 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 typically purchased when old

ones wear out. In princi ple, if households maintain a fixed number of appliances, shipments should equal housing starts plus appliance replacements.

9A.3.5 Economic variables

Appliance price, appliance operating cost and household income are important economic variables affecting ship ments. 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 9A.3.1 ). This rising shipments trend is explained in part by housing starts, which increased 6 perce nt and by appliance repl acements, which rose between 49 percent and 90 percent, depending on the appliance, over the period (Table 9A.3.1 ). a For mature markets such as these, replacements exceed appliance sales associated with new housing construction.

Table 9A.3.1 Physical Household/Appliance Variables

Shipments 1 (millions) Housing Starts 2 (millions) Replacements 3 (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%

1 Shipments: Number of units sold. Sources: AHAM Fact Book and Appliance Magazine.

2 Housing Starts: Annual number of new homes constructed. Source: U.S. Census.

3 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 9A.3.1 ) and “shipment s” (diamond linked line in Figure 9A.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 expected operating life of refrigerators (19 years), clothes washers (14 years), and dishwashers (12 years) and from past shipments. Replacements are further discussed in

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

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

Figure 9A.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 per cent

, operating costs fell between 33 percent and 72 percent, and median household income rose 16

percent (Table 9A.3.2 ).

Table 9A.3.2 Economic Variables

Price 1 (1999$) Operating Cost 2 (1999$) Household Income 3 (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 %

1 Price: Shipment weighted retail sales price. Sources: AHAM Fact Book and Appliance Magazine.

2 Operating Cost: Annual electricity price times electricity consumption. Source: AHAM Fact Book.

3 Income: Mean Household income. Source: U.S. Census.

9A.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 2000Millions9A

- 5 model to measure these trends, making assumptions to minimize the number of explanatory

variables. Finally, results of the regression a nalysis are presented along with an estimate of the price elasticity of demand for appliances. In section 9A. 4.5

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

9A.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 above, 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 shipments ” ) 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 va riables

— 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 + =

where:

TP = Total price,

PP = Appliance purchase price, and

PVOC = Present value of operating cost.

Over the study period, residual shipments increase d 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 decline d 47 percent, 45 percent and 48 percent for refrigerators,

clothes washers

, and dishwas hers, 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

dish washers (Table 9A.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 washer 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 cloth es washers, and a 12

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

- 6 Table 9A.4.1 Estimate of Total Price Elasticity of Demand

Residual Shipments (millions) Total Price (199$)
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 9A.4.1 ).

Yellow points are observed price data; red points are interpolated price data. Figure 9A.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 pri ce, which is calculated as total price divided by household income and represented by the following equation

. d



### Income TP RP =

where:

R P = Relative price,

T

P = Total price, and

Income = Household income.

d Recall that the income elasticity of demand cited in the literature review is 0.50 and the pri ce 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 Shipments9A

- 7 The 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 9A.4.2 ).

Table 9A.4.2 Tabular Esti mate 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

9A.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 household 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. 9A.1

where:

Ship = Quantity of appliance sold,

R P = Relative price,

Starts = Number of new homes, and Rplc = Number 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 used 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 specificat ion is justified, given the limited data availab le and the similarity in price and shipment behavior across appliances ( see Figure 9A.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. 9A.2

where:

CW = Quantity of clothes washers sold, and9A

- 8 DW = Quantify of dishwashers sold.

9A.4.3 Discussion of Model

The most important assumption used to specify this model i s 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 con sumer preferences or increases in the quality of appliances. This assumption 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 correct 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 replacements have similar impacts on shipments.

To investigate the first assumption about discount rates, DOE calculated “present v alue operating cost” using a 20 percent implicit discount rate and performed a second regression analysis based on the models described in equations 9A.1 and 9A.2. The results of this analysis, presented in section 9A. 4. 5 , indicate that the elasticity of relative price is fairly insensit ive to changes in the discount rate.

To investigate the second and third assumptions, DOE specified a regression model separating income from total price and replacements from starts, th ereby adding two additional explanatory variables to the basic mo de l as shown in the following equation:

DW g CW f Rplc e Start d Incone c TP b a Ship **× +**  **× +**  **× +**  **× +**  **× +**  **× +**  **=** Eq. 9A.3

The results of the regression analysis of this model are presented in section 9A. 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.

9A.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 consu mer discount rate and disaggregated variables.

9A.4.4.1 Individual Appliance Model

The individual appliance regression eq uations are specified in the following equation.9A

- 9 

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

In regression analysis of this model, the elasticity of relati ve pri ce ( b ) is estimated to be

- 0 .4 0 for refrigerators,

- 0 .31 for clothes washers and

- 0 .32 for dishwashers (T able 9A.4.3 ), averaging

- 0 .35. These elasticities are similar to those reported in the literatur e survey for appliances (Table 9A.2.1 ). They are remarkably similar to the price elasticity calculated using a

tabular a pproach (Table 9A.4.2 ).

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

one. A coefficient equal to one for this variable 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, despi te the very small data set.

Table 9A.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

9A.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 × + × + + × + × + =

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

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

9A.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 estimates reported in the literature survey and calculated using the tabular approach in Table

9A.4.2

.

Table 9A.4.4 Combined Appliance Model Result

Variable Coefficient t

- stat istic

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 699A

- 10 9A.4.5 Additional Regression Specifications and Results

As described in section 9A.4.3, DOE used 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 total 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.

9A.4.5.1 Lower Consumer Discount Rate

To investigate the first assumption about discount rates, DOE calculated “present value operating cost” using a 20 percent implicit discount rate a nd performed a second regression analysis based on the models described in equations 9A.1 and 9A.2

. The estimated coefficient

associated with the relative price variable in these regressions is almost identical to the

coefficients estimated for the same va riable 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 averages

- 0 .35 f or the three appliances (Table 9A.4.5 ). The elasticity o f price

calcul ated 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 the elasticity of relative price is fairly insensitive to changes in the discount rate.

Table 9A.4.5 Comb ined and Individual Results, 20 percent discount rate

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 239A

- 11 9A.4.5.2 Disaggregated Variables

To investigate the second and third assumptions, DOE constructed 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. 9A.3 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 es timated for the relative 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 9A.4.6 ). The elasticity of relative price based on the model described in equation 9A.2 is

- 0 .34 in the combined regression (Table 9A.4.4) and

averages

- 0 .35 across t he individual appliances (Table 9A.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.

Table 9A.4.6 Disag gregated Regression Results, 37 percent discount rate

9A.5 LONG RUN IMPACTS

As noted above in Table 9A.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 9A.2.1, one source (i.e., Hymans) shows that the price elasticity of demand is significantly different over the short run a nd long run for automobiles

. 1 Because DOE’s forecasts 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. 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 239A

- 12 DOE considers the relative price elasticities determined above in section 9A.4 to be short

run elastcities. DOE was unable to identify sources specific to household durable goods, such as appliances, to indicate how short run and long run price elasticitie s differ. Therefore, to estimate

how the relative price elasticity changes over time, DOE relied on the Hymans study pertaining

to automobiles. Based on the Hymans study, Table 9A.5.1 shows how the automobile price elasticity of demand changes in the years following a purchase 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 9A.5.1 Change in Price Elasticity of Demand for Automobi les 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.

Based on the relative change in the automobile price elasticity of demand shown in Table 9A.5.1, DOE developed a time series of relative price elasticities for home appliances

. Table 9A.5.2 presents the time series.

Table 9A.5.2 Change in Relative Price Elasticity fo r 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

9A.6 SUMMARY

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 that are relevant to th is 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 literature suggests that appl iances 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 d data available for9A

- 13 refrigerators, clothes washers

, and dishwashers to evaluate broad market 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 als o risen during this time. To simplify the analysis, DOE combined 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 per household suggests that the price elasticity of demand for the three appliances is inelastic. Our regression analysis of these same variables suggests that the relative price elasticity of demand is

- 0 .34

. The pri ce 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, the measure is based on an assumption that economic variables, i ncluding 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 accounted for in this analysis.

9A.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 ) 8 and Appliance Magazine 9 as annual values fo r each year, 1980

– 2002

. 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 for 1980, 1985, 1986, 1991, 1993, 1994, 1998 , and 2002 were collected

from AHAM Fact B ook s

. 10 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. 11

• Replacements , driven by equipment retirements, are estimated with the assumption that

some fraction o f 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 12 , 14 years

for clothes washers 13 , 12 years for dishwashers 14 ), replacements are calculated diff erently for each appliance type. Replacements are estimated as the average of shipments 14

– 24 years previous for refrigerators, 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.9A

- 14 • Annual Electricity Consumption (UEC) 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

– 199 7 and 1999

– 2002. 15 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 dis hwashers are assumed to be 19, 14, and 12 years resp ectively. Discount rates of 20 percent 6 and 37

percent 16 were used, producing similar estimates of price elasticity. A study by Hausman

recommend ed a discount rate of “about 20 percent ” in its introduction and pres ented results ranging from 24.1 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 in 2003 dollars. Th ese data w ere collected for each year, 1980

– 2002, from Table H

- 6 of the U.S. Census

. 179A

- 15 REFERENCES

1 S. Hymans. Consumer Durable Spending: Explanation and Predic tion, Brookings Papers on Economic Activity , 1971. Vol. 1971, No. 1, pp. 234

- 239.

2 P. Golder and G. Tellis. Beyond Diffusion: An Affordability Model of the Growth of New Consumer Durables, Journal of Forecasting , 1998.

3 D. Revelt and K. Train. Mixed Logit with Repeated Choices: Household's Choice of Appliance Efficiency Level, Review of Economics and Statistics , 1997.

4 G. Tellis. 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/applia nces/appliances.html >

6 J. Hausman. Individual discount rates and the purchase and utilization of energy using durables, The Bell Journal of Economics , 1979.

7 K. Train. Discount rates in consumer' energy related decisions: a review of the literature, Energy , 1985.

8 Association of Home Appliance Manufacturers. AHAM Fact Books , 2000 and 2003. Washington, DC.

9 Statistical Review. Appliance Magazine , April, 1990.

10 Association of Home Appliance Manufacturers. AHAM Fact Books , 1987, 1988, 1993, 19 95, 2000, and 2003. Washington, DC.

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

– New One

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

12 Duemling, Reubin. Product Life of Refrigerators , 1999. University of California, Berkeley, Energy and Resources Group masters thesis.

13 U.S. Department of Energy

- Office of Building Research and Standards. Final Rule Technical Support Document (TSD): Ener gy Efficiency Standards for Consumer Products: Clothes
Washers, December, 2000. Washington, DC. Chapter 7.

14 U.S. Department of Energy

- Office of Codes and Standards. Technical Support Document: Energy Conservation Standards for Consumer Products: Dishwas hers, Clothes Washers, and Clothes Dryers, December, 1990. Washington, DC. DOE/CE

- 02999P. Chapter 4.9A

- 16 15 Association of Home Appliance Manufacturers. AHAM 2003 Fact Book , 2003. Washington,

DC.

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

- and revealed

- preference data, The Energy Journal , 1995.

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

– Households, Table H

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