A Game-Theory-Based Contract Mechanism to Facilitate Technology Spillover in Emerging Electric Vehicle Markets

Abstract

Electric vehicles (EVs) have been increasingly adopted by both developing and developed countries as an effective means to cope with energy shortage and provide environmental-friendly transportation solutions. However, due to technology gap, domestic electric vehicles (DEVs) in developing countries often cannot compete with well-established imported electric vehicles (IEVs) from developed countries. Therefore, developing countries often face the dilemma of increasing the EV adoption through more IEVs and promoting the development of DEVs. This article proposes an incentive-compatible contract mechanism to address this dilemma. Through a set of game theory models, we compare the commonly used subsidy and tariff policies against the spillover effect of a technology assistance program (TAP) and derive the optimal pricing strategies for DEVs and IEVs. The results show that the implementation of TAP can lead to a more competitive market and significantly increase social welfare. Consumers can benefit from reduced prices of both the DEVs and IEVs, while the profits of the IEVs and DEVs can be enhanced at varying degrees of technology spillover resulted from TAP. Therefore, the proposed TAP mechanism effectively complements the existing subsidy and tariff policies and provides a viable instrument for the government of developing country to reconcile the existing policy dilemma.