Subsidizing a New Technology: An Impulse Stackelberg Game Approach

TL;DR

This paper models government subsidies for zero-emission vehicles using a dynamic impulse Stackelberg game, analyzing optimal subsidy strategies considering firm pricing behavior and providing equilibrium characterization with numerical examples.

Contribution

It introduces a novel impulse control framework for modeling discrete subsidy interventions in a Stackelberg game setting for zero-emission vehicle markets.

Findings

Optimal subsidy strategies depend on firm pricing responses.

The verification theorem characterizes the Feedback Stackelberg equilibrium.

Numerical experiments illustrate the effectiveness of the proposed approach.

Abstract

Governments are motivated to subsidize profit-driven firms that manufacture zero-emission vehicles to ensure they become price-competitive. This paper introduces a dynamic Stackelberg game to determine the government's optimal subsidy strategy for zero-emission vehicles, taking into account the pricing decisions of a profit-maximizing firm. While firms have the flexibility to change prices continuously, subsidies are adjusted at specific time intervals. This is captured in our game formulation by using impulse controls for discrete-time interventions. We provide a verification theorem to characterize the Feedback Stackelberg equilibrium and illustrate our results with numerical experiments.