Indirect network effects in China’s electric vehicle diffusion under phasing out subsidies

Abstract

This study analyzes the indirect network effects between electric vehicle (EV) sales and EV charging infrastructure constructions with consideration of the phasing out EV subsidies in China. A three-level Stackelberg game model is proposed to analyze the interactions among the government, the charging infrastructures investors and EV consumers. The closed-form solutions for government subsidies, charging price, charging infrastructures quantity and EV market share are derived from the theoretical model. Sensitivity analysis is conducted to demonstrate the role of indirect network effects on EV penetration and government subsidies. The results show that ignoring indirect network effects can easily lead to an EV market failure and greatly increase the financial burden for EV penetration. While about 40% subsidy can be saved with consideration of indirect network effects. With phasing out EV subsidies, the government is suggested to shift the purchasing subsidy to the charging infrastructure subsidy. The subsidy strategy derived from the proposed model outperforms the other possible solutions in terms of social welfare maximization. A scenario analysis for the environmental impact of EVs shows that EV promotion should be coordinated with clean electricity generation development. The impact of energy price fluctuations on EV diffusion is also discussed, indicating that the gasoline price significantly influences EV adoption. Specifically, when the gasoline price increases from 3.8 USD/gal to 5.7 USD/gal and 7.6 USD/gal, the EV market share will increase by 25% and 42%, respectively.