A hybrid electric vehicle market penetration model to identify the best policy mix: A consumer ownership cycle approach

- Our model captures circular causal dynamics among consumer purchase, use and retirement.
- We suggest a new HEV market penetration model of identifying the better combination of policies.
- Combination of purchase tax credit and retirement subsidy is effective more than any single policy.
- Smaller one among policy incentives become a bottleneck for market penetration.
- 50% tax credit and $1300 retirement subsidy can achieve Korean objective of 800,000 HEVs by 2020.

HEV market penetration exists in a circular loop of purchase, use, retirement, and repurchase, i.e., the consumer ownership cycle. Existing HEV market penetration models focus on a single linear process, such as purchasing, without considering other processes. Market penetration policies based on such models can facilitate a single process, but they cannot boost market penetration as planned. Combining system dynamics with consumer choice models, we propose a new HEV market penetration model to describe the dynamic circular market penetration process as well as its interaction with macroeconomic conditions and government policies. In this way, our model finds bottlenecks, estimates the future effects of different policies to solve bottlenecks, and identifies more effective combinations of policies to boost HEV market penetration. Our empirical analysis of Korean HEV market penetration reveals that combining a tax incentive and retirement subsidy will be more effective than offering either of those alone. Also, HEV market penetration becomes slower when the tax incentive is smaller than the retirement subsidy (or vice versa) because consumers escape the market penetration loop.