Innovation, Emissions Policy, and Competitive Advantage in the Diffusion of European Diesel Automobiles

Import tariffs have decreased signicantly over the past 30 years due to a large number of economic integration agreements. We investigate whether national policies, such as environmental regulations, can be an effective replacement to protect domestic industry. Our focus is the European automobile market where diesel vehicles are dominant and emissions policy favors these vehicles. We estimate a discrete choice, oligopoly model of horizontally differentiated products using changes in observed product characteristics to identify the underlying demand and cost parameters while allowing for correlation between observed and unobserved (to the researcher) product characteristics. We find diesels were an important competitive advantage for European automakers over foreign imports during our sample. Further, EU emissions policy favored diesels and amounted to a signicant non-tariff trade policy equivalent to a 13-16% import tariff. Imposing product characteristic exogeneity in the estimation leads the researcher to over-state these effects. Read full paper (PDF)