Working Paper 03-09: Audi vs. BMW – On the Physical Heterogeneity of German Luxury Cars

Vistesen, Claus (2009) - Audi vs. BMW – On the Physical Heterogeneity of German Luxury Cars, Working Paper 03-09, exam paper Methods in Empirical Business Economics (Copenhagen Business School, fall/winter 09).

This paper uses Logit and Probit regressions to test for and quantify the physical heterogeneity between German luxury cars. Using a matched sample database, the binary response variable consisting of Audis and BMWs is fitted to a matrix of physical characteristics such as power, torque, fuel consumption, engine displacement etc. The results indicate that having a forced induction engine (e.g. turbo) is associated with a 51% lower probability of observing a BMW and that increasing fuel consumption by 1 liter per 100km lowers the probability of observing a BMW with 61%. The results are discussed in relation to the idea that consumers may not differentiate across luxury products on the basis of physical characteristics and how this may introduce a bias with respect to predicting demand in the context of available market data.