Real prices of major appliances (refrigerators, dishwashers, heating and cooling equipment) have been falling since the late 1970s despite increases in appliance efficiency and other quality variables. This paper demonstrates that historic increases in efficiency over time, including those resulting from minimum efficiency standards, incur smaller price increases than were expected by the Department of Energy (DOE) forecasts made in conjunction with standards. This effect can be explained by technological innovation, which lowers the cost of efficiency, and by market changes contributing to lower markups and economies of scale in production of higher efficiency units. We reach four principal conclusions about appliance trends and retail price setting:
- For the past several decades, the retail price of appliances has been steadily falling while efficiency has been increasing.
- Past retail price predictions made by the DOE analyses of efficiency standards, assuming constant prices over time, have tended to overestimate retail prices.
- The average incremental price to increase appliance efficiency has declined over time. DOE technical support documents have typically overestimated this incremental price and retail prices.
- Changes in retail markups and economies of scale in production of more efficient appliances may have contributed to declines in prices of efficient appliances.