Reference-Dependent Electric Vehicle Production Strategy Considering Subsidies and Consumer Trade-Offs

In this paper, we extend previous reference-dependence newsvendor research by incorporating both consumer trade-offs and government subsidies to evaluate the relevant influences on the optimal electric vehicle (EV) production decisions. We present the properties of the model, derive the closed-form solutions for the model given the relevant constraints, and use numerical experiments to illustrate the results. We find that subsidies, loss aversion, the performance of both EVs and internal combustion engine-powered vehicles (ICEVs), and the coefficient of variation of demand are significant factors influencing the optimal production quantity and the expected utilities of EV production. The high selling price and other high costs of ICEVs help offset the influence of loss aversion, whereas the high costs of EV enhance loss aversion. Our study enriches the literature on subsidies for EVs by establishing a behavioral model to incorporate the decision bias in terms of loss aversion at the firm level. These findings provide guiding principles for both policymakers and EV managers for making better strategies to promote EVs in the early immature market.