Subsidizing a New Technology: An Impulse Stackelberg Game Approach

Governments are motivated to subsidize profit-driven firms that manufacture zero-emission vehicles to ensure they become price-competitive. This paper introduces a dynamic Stackelberg game to determine the government's optimal subsidy strategy for zero-emission vehicles, taking into account the pricing decisions of a profit-maximizing firm. While firms have the flexibility to change prices continuously, subsidies are adjusted at specific time intervals. This is captured in our game formulation by using impulse controls for discrete-time interventions. We provide a verification theorem to characterize the Feedback Stackelberg equilibrium and illustrate our results with numerical experiments.