Does lower electric vehicle production cost spur traditional automaker electrification? Spillovers of cost-reduction investments

Abstract

Cost-reduction investments by leading electric vehicle (EV) automakers like Tesla are essential in lowering EV prices and accelerating market adoption. However, the impact of these investments on the electrification strategies of traditional gasoline vehicle (GV) automakers remains unclear, particularly when spillovers to GV automakers producing perfectly substitutable EVs are possible. This study examines the interaction between these factors within a Cournot competition model involving one EV automaker and one GV automaker, revealing three key insights. First, the EV automaker’s cost-reduction investments do not necessarily encourage the GV automaker to pursue electrification, even with significant spillovers; the outcome also depends on product substitutability between GVs and EVs. Second, the EV automaker tends to increase investments under low spillovers and decrease them under high spillovers in response to GV automaker electrification. Nevertheless, these investments cannot fully offset the profit erosion caused by GV automaker electrification. Third, these findings remain qualitatively robust across several extended scenarios, including asymmetric consumer reservation prices, imperfect EV substitution, a shift from quantity to price competition, and a Stackelberg game framework. The model is also extended to evaluate the effects of three government interventions—purchase subsidies, carbon taxes, and emission standards—alongside the impact of oligopolistic competition.