Market Dynamics and Indirect Network Effects in Electric Vehicle Diffusion

TL;DR

This paper models the electric vehicle market as a two-sided game between consumers and charging station investors, revealing underinvestment issues and analyzing policy impacts on EV adoption.

Contribution

It introduces a sequential game framework for EV and EVCS interactions, providing insights into market underinvestment and policy effects on EV diffusion.

Findings

Market underinvests in EV charging stations compared to social optimum.

Subsidies can increase EV adoption but may not fully address underinvestment.

Market equilibrium leads to slower EV diffusion than socially optimal levels.

Abstract

The diffusion of electric vehicles (EVs) is studied in a two-sided market framework consisting of EVs on the one side and EV charging stations (EVCSs) on the other. A sequential game is introduced as a model for the interactions between an EVCS investor and EV consumers. A consumer chooses to purchase an EV or a conventional gasoline alternative based on the upfront costs of purchase, the future operating costs and the availability of charging stations. The investor, on the other hand, maximizes his profit by deciding whether to build charging facilities at a set of potential EVCS sites or to defer his investments. The solution of the sequential game characterizes the EV-EVCS market equilibrium. The market solution is compared with that of a social planner who invests in EVCSs with the goal of maximizing the social welfare. It is shown that the market solution underinvests EVCSs, leading to slower EV diffusion. The effects of subsidies for EV purchase and EVCSs are also considered.