Optimal production and pricing strategies in auto supply chain when dual credit policy is substituted for subsidy policy

Abstract

The Chinese government has proposed a dual credit policy (DCP) as a substitute for electric vehicle (EV) subsidies, which fluctuates the auto market. To investigate the policy substitution influences for the production and pricing strategies, we use Stackelberg game paradigms to model a two-stage auto supply chain. The manufacturer regulated by the DCP produces both EV and internal combustion engine vehicles (ICEV). The retailer sells them to heterogeneous consumers. By backward induction, the optimal production and pricing strategies are derived for the subsidy policy only (scenario B) and with a joint subsidy policy and DCP (scenario DS). Our findings show, 1) different with only one case in scenario B, the manufacturer and the retailer have three corresponding optimal production and pricing strategies in scenario DS, according to the manufacturer’s Corporate Average Fuel Consumption credit (CAFC credit); 2) the demand for the ICEV may also decline like EV as the subsidies are phased out in scenario DS when the manufacturer’s CAFC credit is in balance case; 3) the changes of DCP rules may have different effects on the optimal production and pricing strategies in different CAFC cases.