Vehicle product-line strategy under government subsidy programs for electric/hybrid vehicles

Abstract

To reduce the carbon emissions produced by the traditional fuel-driven vehicles, governments have recently proposed various subsidy programs to promote the electric/hybrid vehicles (EVs), such as the consumer subsidy (CS) program and the R&D subsidy (RS) program. In the presence of subsidy programs, vehicle manufacturers would decide whether to develop or adjust their product lines, i.e., whether to produce traditional fuel vehicles (FVs) and/or electric/hybrid vehicles. We show that when the manufacturer’s technology capacity for improving the energy-saving levels of EVs is at an intermediate level, she prefers to produce both types of vehicles, and otherwise, she would choose to offer one type of vehicle only. Moreover, contrary to our intuition that the government programs can always decrease the carbon emissions, we find that both CS and RS programs might pose negative impacts on the environment. These programs can effectively reduce the carbon emissions only when the manufacturer decides to offer both EVs and FVs. Moreover, we show that the economic and environmental interests of the subsidy programs may not be always aligned. We derive the conditions under which the CS program can outperform the RS program from both the environmental and economic perspectives. In addition, we also discuss a mixed subsidy program (MS) wherein the government offers both a consumer subsidy and a R&D subsidy simultaneously. We discuss whether this mixed program can reduce carbon emissions more effectively than the CS and RS programs.