Investigation of discriminatory government subsidies for fuel vehicles and new energy vehicles by considering trade-ins

Baoyu Liao, Mengyu Sun, Xiaoxi Zhu and Panos M. Pardalos ()
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Baoyu Liao: Hefei University of Technology
Mengyu Sun: Hefei University of Technology
Xiaoxi Zhu: Hefei University of Technology
Panos M. Pardalos: University of Florida

Journal of Combinatorial Optimization, 2025, vol. 50, issue 3, No 4, 39 pages

Abstract: Abstract With the increasing awareness of environmental protection and the rapid development of the vehicle industry, vehicle trade-in has become an important initiative to promote the consumption of new energy vehicles (NEVs) and product upgrading. This study analyzes the decision-making of a vehicle manufacturer and changes in market demand by considering discriminatory government subsidy and consumer preferences. Results show that government subsidy policy not only significantly affects consumers vehicle purchase choices, but also profoundly influences manufacturers’ optimal NEVs range R&D investment and marketing strategies. Specifically, when demand for trade-in fuel vehicles (FVs) or NEVs is constrained by higher initial purchase costs or higher trade-in subsidies (with lower production costs for FVs or lower trade-in subsidies), focusing merely on subsidizing trade-in NEVs is optimal for incentivizing the manufacturer to increase the optimal investment in range R&D (highest profit). Conversely, in the absence of demand constraints, this is related to the purchase subsidy for NEVs. In addition, the extended section explores the impact of simultaneously subsidizing trade-in FVs and NEVs on manufacturers’ technological innovation and profitability. We find that the effectiveness of the new proposed subsidy depends on the production cost of FVs as well as the level of the subsidy. Specifically, under demand constraints for trade-in FVs, as subsidies for both trade-in FVs and NEVs increase, manufacturers’ technological innovation investment under the simultaneous subsidy scenario will be lower than in the case of subsidizing only NEVs. However, when the production costs of FVs are high, simultaneous subsidies can lead to higher profits for the manufacturer compared to subsidizing only NEVs.

Keywords: New energy vehicles; Fuel vehicles; Subsidy policies; Trade-in program; Range R& D (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10878-025-01352-w

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