$2.99 Gas

I love Chrysler’s new incentive program that guarantees consumers who buy one of their new cars or trucks won’t pay more than $2.99 a gallon at the pump for the first three years they own the vehicle.

When you sign up, you get a special credit card that can only be used to buy gas. When you swipe it, $2.99 per gallon goes to you, the rest of the cost is paid by Chrysler. (There are some limits on how many gallons per year you can buy, whether you can use the premium grade gas, etc.)

I think this is a brilliant idea on Chrysler’s part.

I believe consumers systematically exaggerate the importance of gas prices to their budgets. The typical American just doesn’t spend that much money on gas.

The way we buy gas — every week or two, with the prices staring us in the face as we stand at the pump — makes price fluctuations far more visible than for other goods. Someone who signs up for this program will think about Chrysler and how they are paying part of the cost of the gas every time they fill up. I suspect that will increase the brand loyalty of people on the program.

There is also every reason to believe that gas prices will be lower in the future than they are now, in spite of the peak oil rhetoric. So I doubt the program will cost Chrysler much (although presumably they’ve hedged the risk anyway).

It is a program that can catch people’s attention. Twice in the last two days I have entered a conversation in which Chrysler’s $3 gas was the topic. (Both times it was economists talking; maybe regular folks are not so enthralled). The last car manufacturer incentive scheme I can think of that generated this much buzz was the “employee discount” plan from a few years back.

If it works, I don’t think it will be that easy for the competitors to copy, at least not quickly (in contrast to the “employee discount” plan which spread like wildfire across the various car manufacturers). Setting up and administering this program must be a logistical nightmare. I could imagine it taking another company many months to get all the pieces into place.

And most important of all to the academic economist, the data generated by the program could be the basis for some great research papers.


Linda

I just read the advice offered to me by commenter #4 and a lot of it makes sense. We definitely are feeling that living in the country is a luxury we may not be able to afford, but after several years of a lot of bad knocks that were our of our control (illness, death of relatives, huge storm taking down our storage barn), well, our resources and energies are a little thin. And maybe one of us is more adjustable than the other one, if you know what I mean. But it's still annoying. I've spent time in a cubicle and it's not for me. You can live well without buying in to the consumer thing, I could give you a long list of stores that I've never been in.

Antique dealers are one of the few vendors who are continually asked for their "best price". All this does is make dealers jack up the price in the first place because they know they are going to get beat up. One show I tried telling people what I actually wanted to get out of an item, but that strategy didn't work too well.

I'd rather be poor and live freely, my choice, my cost.

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dan p

I think this offer has now been copied by a Nissan dealership in North Carolina (I think the radio ad was for Southern States Nissan, which I believe has 4 dealerships).

I heard the ad on the radio the other day and the details are no longer fresh in my memory, but I believe the offer was for two (maybe three?) and I think unlimited mileage (though I guess people average about 12k anyway).

The catch was that they are offering "50% off gas" - to be refunded at the end of the duration of the subsidized gas.

I'd guess that they are betting on lower prices in the future? Or just the fuel economy of most of their cars (I guess to take more advantage of this offer you'd have to buy a more expensive SUV/truck as opposed to an Altima)?

Andrew

Every week or two?! How about a few times every week. Not everyone is walking to UChicago with their backpack everyday.

buckylovestrees

I am an ardent supporter of this blog but i have today this post really hurt my feelings. Data for economists is all well and good but to hear praise for a incentive to drive and pollute more kind of depresses the he'll out of me. I don't really care about the arguments for tech progress being the answer to environmental problems. Higher prices, less current consumption, more trees for my kids. Done.

Alan

Chrysler also presumably gets the credit card data -- meaning they get to see exactly how often and where each one of their consumers fills up and correlate that with what kind of car they chose to buy. Marketing bonanza.

Ray G

I drive a Chevy Silverado with an 8.1 liter engine. (That's 496 cubic inches to you metric-phobes.)

People actually ask me what I get in mileage. As if I would own this thing if I were worried about mileage. I truly don't know what my mileage is, but I do know it's not good.

Point being is that I've always maintained that people put far too much emphasis on gas prices. They pay ridiculous prices for so many frivolous things, but they'll drive out of their way to save a dime on a gallon of gas.

Marsello

It's a simple example of what the British called "penny wise but pound foolish" which explains our obsession to nitpick the gas price increases and lose sight of our real problem that is our lifestyle, which are the credit mentality, overpriced latte, the housing bubble, etc.

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mktg4412

I agree, the purchase of gas is more of an emotional purchase then a involved transaction. 2 cents or 4 cent difference with a purchase of 16 gallons does not add up to a dollars, but consumer will chose the lessor price. Some gas stations will even charge for the use of plastic which will offset the savings in the gas price with the charge of the transaction. To read more on this subject please visit my site, www.pricesdollarsrobbery.blogspot.com

Brad

@16 How is the notion that ethanol is driving up the cost of food ridiculous?

Growing corn for ethanol reduces the supply of corn available for eating; as supply decreases, price increases. And this does not only affect the price of corn, as other crops are replaced with corn for ethanol.

Davey

@18 Here is where the necessary $1200 per year comes from.

That $2.10 per gallon you used would have been pre-Katrina, or in 2005. Three years ago.

Assume someone was making $50,000/year then.
Assume 2% per year in wage increases, COLA, whatever. Most wage earners that remain employed in the same job get what amounts to an inflation-neutral increase each year.

After 3 years, that $50K is now $53 K. And that is why liberalarts@19 says that the current price of gas, "...doesn't seem to affect my regular spending."

The Chrysler move is a stroke of marketing genius, if it works, but easily copied.

John Jay

I turned off 2/3 of my house (in New Jersey) except on Saturday-Sunday. My heating bills this year are about the same as 3 years ago. And I drive a 9 year old car. My total insurance+payment+gas+maintenance now is cheaper than it was 6 years ago.

Ted McKeown

I think the price of gas effects the price of everything we buy and we should be worried about this. World vision stated they are having trouble feeding the starving children because food costs are going up and that's partly because of soaring gas prices. Greed is the root problem here and we the consumer must do something. We are taking a poll on our website http://www.nbtv.ca . You're welcome to participate

Linda

This post is very annoying to me. You must not know any poor people. We use our car for our work, buying and selling antiques, and gas is a HUGE expense for us. I agree that it has to go up so that alternatives are more viable, but the transition is extremely painful for us. We don't visit friends, much less health clubs! Cable TV? Forget about it! Eating out? More like a big pot of soup that lasts 3 or 4 days. Where we live people drive 30 to 50 miles a day one way to work if they want to make more than 8 bucks an hour.

Mercutio.Mont

"A large and often overlooked part of the success of Southwest Airlines is the fact that they were able to lock in the price of jet fuel for several years. My question is: why can't regular consumers do this?"

Normal consumers can get close to that by going long on gas or oil futures. By going long on those futures, they make money to offset their increased costs if fuel prices rise and lose money to offset their decreased costs if fuel prices drop.

It's pure speculation - as was SouthWest Airlines' deal. If gas prices had tanked, then SouthWest Airlines would have been left holding the bag. They bet and won. Their competitors bet and lost.

Overall, I imagine that buying gas insurance/oil futures would have been a wise move three years ago. Buying oil futures today may not be the smartest idea ever.

discordian

It's a load of crap to anyone who can work a calculator. But that doesn't mean it's a sharp marketing move.

Charles

One thought I had - since this relies on using a credit card provided by Chrysler, I wonder if Chrysler can basically pay for it all with the late fees and periodic interest that people accrue.

John Graves

This is a great idea! Recently I've been wondering why there isn't really a robust market for gas insurance. A large and often overlooked part of the success of Southwest Airlines is the fact that they were able to lock in the price of jet fuel for several years. My question is: why can't regular consumers do this? I'm sure there are a lot of people out there who will gladly pay a $40 premium per month so that they can fix the price of gas at, say, $2.50 per gallon.

jonathan

The "employee discount" program worked because it let you "inside" or at least gave you that feeling. This one creates a continuing relationship and I wonder if it will differ in success from OnStar. I haven't seen any data on whether OnStar subscribers keep their cars longer, buy GM again, etc. - though it hasn't worked miracles for GM's market share.

Again, haven't seen data but many people buy gas with cash or with debit cards. Higher gas prices should then see a switch from cash / debit to credit so the pain is deferred. I've wondered when standing at the pumps if that switch wouldn't generate some additional spending as people use up the immediate cash they normally use for gas.

If you pull up to a pump and realize you're paying $60 to fill up, you can swipe a Visa or MC instead of a debit card / cash and then you have that $60 in your "pocket." I would think any change in sales methods would be easily tracked.

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David

It's trivial to set up. There are tons of fleet cards out there, and the banks that administer them would love to have the volume a program like this provides.

We'll see how well it works in a few months when sales figures are out, I'll bet it isn't as big a bump as hoped. Once people buy a car, they start to become more economically rational. It's the small decisions, like driving an extra few miles to save 2 cents/gallon where people are economically irrational. On houses and cars, people are more rational, partly because they are likely to ask for help.

Matthew

Mason: Few of the promotions offered by mfrs/dealers are good for consumers. As long as the general public doesn't understand the concept of NPV people will continue to overpay for cars. I went looking at cars once and the salesperson was not amused when I started typing values into a financial calculator.