Can Proactive Fuel Economy Strategies Help Automakers Mitigate Fuel-Price Risks?

McManus, W. 2006. Can Proactive Fuel Economy Strategies Help Automakers Mitigate Fuel-Price Risks?.
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The high oil and gasoline prices we have experienced over the past two years have dramatically increased the attention paid to vehicle fuel economy by drivers, new car buyers, and the government. Detroit automakers, who have long depended on the least fuelefficient vehicles to provide most of their profits (and some of who have argued that fuel economy did not matter very much to their customers) are seeing their sales and profits evaporate, as new vehicle buyers switch to more fuel-efficient vehicles. Management apparently assumed that (1) fuel prices would stay low forever, and/or that (2) their customers would not change their vehicle choices because of high fuel prices. In this study, we examine the economic viability of improving fuel economy as a strategy to mitigate the risk of high fuel prices and to gain a competitive advantage. By adopting a �game theory� approach to representing the competitive interactions among the automakers and using different scenarios to represent the risks automakers face with respect to fuel prices and consumer demand, we are able to identify which strategies maximize profits for the automakers and support U.S. auto industry employment.