In the global effort to mitigate greenhouse gas emissions and combat climate change, electric vehicles (EVs) have become vital alternatives to traditional fuel vehicles (FVs) in transportation. However, the limited market penetration of EVs is largely due to factors such as a lack of environmental awareness among consumers and high production costs faced by manufacturers. To encourage the development of EVs, governments often implement subsidies aimed at either manufacturers or consumers, but the efficiency and cost-effectiveness of these subsidy strategies in competitive automotive markets have not been thoroughly investigated.
In light of these challenges, a research team from the School of Economics and Management at Nanjing Tech University and Southeast University conducted a study titled “Optimal Production Strategy for Auto Manufacturers with Government Subsidies in Competitive Environments.” This research utilizes the Hotelling model alongside evolutionary game theory to evaluate the optimal production strategies—whether to produce EVs or FVs—of duopoly auto manufacturers. The study also examines the effects of two types of government subsidy policies: manufacturer subsidies and consumer subsidies.
By developing a one-shot duopoly game and an evolutionary game model, the researchers investigated how variables such as consumer environmental preferences and differences in EV production costs impact manufacturers” strategic decisions. The study identifies specific conditions under which subsidies can be both effective and cost-efficient.
Key findings reveal that consumer environmental preferences significantly influence manufacturers” market shares and profits, ultimately shaping their production strategies. When consumer preferences are high enough, both manufacturers opt for EV production. In cases of moderate preferences, only the manufacturer with a cost advantage produces EVs, while low preferences lead to no manufacturers producing EVs. Additionally, greater disparities in EV production costs between manufacturers increase the likelihood of them adopting distinct stable strategies over time.
The research also indicates that both types of subsidies are only effective if they surpass a certain threshold. When consumers demonstrate high environmental awareness, manufacturer subsidies prove to be more cost-effective, whereas consumer subsidies are more beneficial when awareness levels are low. Numerical analyses conducted within the study further support these conclusions. For example, in situations characterized by low consumer environmental preference, the stable strategy for both manufacturers tends to favor FV production. In moderate preference scenarios, only the manufacturer with a cost advantage opts for EVs, while high preference scenarios see both manufacturers shift towards EV production.
Moreover, as the differences in EV production costs increase, the manufacturer at a cost disadvantage gradually transitions from producing EVs to FVs. The paper, authored by Jingjing XUE, Bin ZHENG, and Sijie LI (the corresponding author), contributes valuable insights into the dynamics of auto manufacturing strategies in relation to government incentives.
The full text of the study can be accessed at: https://doi.org/10.1007/s42524-023-0261-5.
