Optimal Production of a Vehicle Manufacturer Without Government Subsidies

Abstract

As the new energy vehicle (NEV) subsidy policy of the Chinese government will completely exit the market in 2020, qualified NEV production manufacturers need to decide how to produce NEVs with/without producing internal combustion engine vehicles (ICEVs). Besides, the consumer’s willingness to pay a premium for NEVs plays an important role in influencing the manufacturer’s production decisions. Therefore, this paper analyzes the optimal production and pricing strategies of a manufacturer without NEV subsidies under all possible consumer’s premiums. We first find that, when the premium is below a certain amount, the manufacturer only produces ICEVs but not NEVs. However, when the premium is between this level and under a certain upper threshold, the manufacturer should start to produce NEVs and ICEVs concurrently. After the premium increases over this upper threshold, the manufacturer only produces NEVs but no longer produces ICEVs. On the other hand, we identify some critical values of premium affecting consumer’s purchase choice under different production strategies. Second, when the consumer’s premium increases, the ratio of NEVs produced by the manufacturer increases and there is a downward trend in vehicle consumer population, resulting in only 1/2 of original consumers purchasing cars. Third, we also identify that there is a U-shaped correlation between manufacturer’s profits and consumer’s premiums. The manufacturer’s profits will decline first and then rise with respect to the increasing premiums. The findings can guide the manufacturer to conduct NEV production, and help policy-makers to make the more effective policy to activate consumer’s purchase intention and NEV production through. Finally, we verify the findings as aforementioned by numerical analysis.