The focus of this paper is to investigate consumer response to supply and demand shifters in atransportation fuel market with a viable short-term substitute for traditional petroleum products.Many studies, using a variety of estimation techniques and studying dozens of countries, haveconfirmed inelastic price and income elasticities for gasoline. Transportation fuel substitution hasbeen difficult due to the high costs and time needed to change fuel types. Flex-fuel technologyreduces the barriers of substitution by providing a quick and cheap option for switching betweengasoline dominant blends of fuel to ethanol dominant blends. In 2012, over 87 percent of all newvehicles sold in Brazil used flex-fuel technology, allowing Brazilian consumers to arbitragebetween gasoline and ethanol. Brazil’s mature ethanol market lowers the substitutability barriereven further. Brazil has had a gasoline substitute, sugarcane based ethanol, since the 1980s. Thispaper extends the gasoline demand research by estimating gasoline supply and demandsimultaneously in a market where the barriers to fuel substitution are considerably lower.Estimating the supply and demand curves simultaneously provides a unique insight into theeffects of a well-developed ethanol market and flex-fuel technology on consumer behavior. Theresults have potential implications on consumer behavior in the United States, where the ethanoland flex-fuel vehicle markets are growing.
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