Heterogeneity of Indirect Network Effects: Evidence from the Chinese Electric Vehicle Market

Abstract

Governments can accelerate technology adoption by directly subsidizing the technology or supporting complementary infrastructure, particularly when indirect network effects are present. This paper examines the heterogeneity of these indirect network effects, driven by variations in product characteristics within the market. Using data on electric vehicle (EV) sales and charging infrastructure provision in China, and focusing on a period of rapid market expansion with increasing product differentiation, we analyze the indirect network effects between EV adoption and charging stations, investigating their heterogeneity. We also assess the relative effectiveness of EV purchase subsidies and charger subsidies in promoting EV adoption. Our findings reveal that the strength of indirect network effects depends on vehicle characteristics, particularly driving range. Furthermore, the two subsidy instruments have distinct distributional effects: purchase subsidies primarily benefit high-range vehicles and their buyers, while charger subsidies disproportionately favor low-range vehicles and their buyers.

Keywords: indirect network effect, subsidy, electric vehicles, welfare analysis

JEL Classification: H23, D61, L62