September 14, 2020, 14:00–15:30
Industrial Organization seminar
How do firms adjust the price and quality of products in response to subsidies and marginal cost changes? Knowing the answer is essential for designing electric vehicle subsidies. I show that the answer to this question is ambiguous in a monopoly model of quality provision. I then build an equilibrium model of competition in the new car market where firms can adjust the quality of electric vehicles. I estimate the model using data from Germany and find that the marginal cost of quality provision dropped by 39\% between 2012 and 2018. Firms passed on this lower cost of quality provision by increasing quality, leading to higher prices. On the contrary, I find that firms passed on a subsidy introduced in Germany in 2016 by reducing price more than one-to-one, leading to lower quality. Incentivizing quality provision with a subsidy leads to higher quality at the expense of diffusion, leaving policymakers with a tradeoff between quality and quantity.