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Uncertainty in the price of gasoline and the automobile manufacturers' 1990 retooling decision

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  • Ford, Andrew

Abstract

We present an analysis of the retooling decision of a full-line automobile manufacturer facing large uncertainty in the price of gasoline. The paper focuses on the appropriate mix of five car classes to be produced in 1990. By calculating the severity of a possible market mismatch problem with different retooling decisions, we show the effect of different strategies that could minimize the adverse effects of world oil price uncertainty. The manufacturer's retooling decision is considered with 1.(1) no competition,2.(2) competition from another full-line company, and3.(3) competition from another full-line company and a limited-line foreign manufacturer. Of particular interest is whether the market risks are so great that government intervention is required to assist the manufacturers in planning for an uncertain future. Specifically, we question whether the corporate average fuel efficiency standards should be extended past 1985 to encourage automobile manufacturers to retool for increased fuel efficiency in the face of highly uncertain gasoline prices.

Suggested Citation

  • Ford, Andrew, 1984. "Uncertainty in the price of gasoline and the automobile manufacturers' 1990 retooling decision," Energy, Elsevier, vol. 9(6), pages 519-540.
    • Handle: RePEc:eee:energy:v:9:y:1984:i:6:p:519-540
    DOI: 10.1016/0360-5442(84)90031-8
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