The Market for Electric Vehicles: Indirect Network Effects and Policy Impacts

Abstract

The market for plug-in electric vehicles (EVs) exhibits indirect network effects in that there is interdependence between consumer decision of EV purchase and investor decision of charging station deployment. Through a stylized model, we demonstrate that indirect network effects on both sides of the market lead to feedback loops which could amplify shocks and alter the diffusion process of the new technology. The relative strength of indirect network effects on the two sides of the market has important implications on policy design. Based on quarterly EV sales and charging station deployment in 353 Metro areas from 2011 to 2013, our empirical analysis finds indirect network effects on both sides of the market with those on the EV demand side being stronger. The federal income tax credit of up to $7,500 for EV buyers contributed to 40% of the EV sales during 2011-2013 with feedback loops explaining 40% of that increase. A policy of equal-sized spending but subsidizing charging station deployment would have been more than twice as effective in promoting EV adoption.