Essays in Industrial Organization and Environmental Economics
This dissertation studies both theoretically and empirically how the allocation of subsidies
might matter for economic outcomes in a two-sided market framework.
The first chapter establishes a non-neutrality result with respect to subsidy allocation in the price theory of two-sided markets with membership externalities building on the works of Rochet and Tirole (2006) and Armstrong (2006). There are many examples of two-sided (or more generally, multi-sided) markets in which two (or more) groups of agents interact via intermediaries or “platforms.” The distinguishing feature of these markets is the presence of cross-group externalities: the benefit enjoyed by a member on one side depends on the number of members on the other side of the market. Examples of two-sided markets include: video game platforms, news media, credit cards, and electric vehicles. A basic feature of two-sided markets established by Rochet and Tirole (2006) is the non-neutrality of price structure, that is, how usage fees or membership prices are allocated between the two sides of the market have an impact on economic outcomes like buyer demand.
In this work, I consider whether this non-neutrality in the price allocation carries over to the case of subsidies (or taxes) in two-sided markets. Specifically, I develop a stylistic two-sided market model to show that subsidies to the different sides of the market are non-neutral, in the sense that one dollar spent on subsidies given to one side of the market has a different economic impact as the same amount spent on subsidies given to end-users on the other side of the market. This result is driven by a key feature of two-sided markets: the positive network externalities between the two sides of the market. The non-neutrality of the allocation of subsidies has important implications for such quickly growing industries like the electric vehicle market in which currently most governments are subsidizing both sides of the market. Therefore, if we really want to learn where to give subsidies to achieve the policy goal of increased electric vehicle sales the findings of this chapter show that we need to empirically estimate the impact of price subsidies to buyers versus direct subsidies to charging stations using a two-sided market framework.
The second chapter, building on the non-neutrality result of the first chapter, provides an empirical analysis of the impact of electric vehicle incentives on electric vehicle adoption that highlights the importance of accounting for the network externalities present in this market. I model the electric vehicle sector as a two-sided market with network externalities to determine which side of the market is more efficient to subsidize depending on key vehicle demand and charging station supply primitives. I use new, large-scale vehicle registry data from Norway to empirically estimate the impact that different subsidies have on electric vehicle adoption when network externalities are present. I present descriptive evidence to show that electric vehicle purchases are positively related to both consumer price and charging station subsidies. I then estimate a structural model of consumer vehicle choice and charging station entry, which incorporates flexible substitution patterns and allows me to analyze out-of-sample predictions of electric vehicle sales.
In particular, the counterfactuals compare the impact of direct purchasing price subsidies to the impact of charging station subsidies. I find that between 2010 and 2015 every 100 million Norwegian kroner (around 12.39 million USD) spent on station subsidies alone resulted in 835 additional electric vehicle purchases compared to a counterfactual in which there are no subsidies on either side of the market. The same amount spent on price subsidies led to only an additional 387 electric vehicles being sold compared to a simulated scenario where there were no electric vehicle incentives. However, the relation inverts with increased spending, as the impact of station subsidies on electric vehicle purchases tapers off faster.