Optimal production strategy for auto manufacturers with government subsidies in competitive environments

Abstract

Using the Hotelling model and evolutionary game theory, this paper studies the optimal production strategy of duopoly auto manufacturers and explores the impacts of two government policies (manufacturer and consumer subsidies) on strategies related to the production of electric vehicles (EVs) or fuel vehicles (FVs). The study finds that consumers’ environmental preferences have direct effects on manufacturers’ market shares and profits, which in turn, affect the manufacturers’ production strategy selection. Specifically, when consumer environmental preference is sufficiently high, both auto manufacturers will eventually choose to produce EVs; when it is moderate, only one with a cost advantage will choose to produce EVs. Finally, when it is low, neither auto manufacturer will produce EVs. The findings further reveal that the more significant the difference in EV production costs is, the more inclined auto manufacturers are to choose a different final stable strategy. Regardless of whether the government subsidizes manufacturers or consumers, the policy only works if subsidies reach a certain threshold. The study also identifies the conditions under which government subsidies are considered more cost-effective.

Graphical abstract

Keywords

supply chain management / low-carbon emission / electric vehicle / subsidy / evolutionary game theory

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