Engines Powered by Renewable Energy, the Network of Filling Stations and Compatibility Decisions

Summary The paper addresses entry barriers for a new technology - hydrogen powered cars or cars with fuel cell engines - if the network of its filling stations is missing. We use Hotelling’s model of product differentiation to characterize a situation where an incumbent firm produces the old technology, compatible with the existing network of filling stations, and an entrant, who cannot use this network. The oil companies myopically support the use of the original technology based on fossil fuel by following Hotelling’s pricing rule. This encourages the entrant to invest in compatibility. The entrant with the new technology is a Stackelberg leader while the old technology firm is the follower. In the first stage, the entrant invests in the network of filling stations and in the second stage both compete in prices, given the network situation. These two-step models are repeated until the network is compatible or the oil is exhausted. The main positive result is that the fossil fuel powered cars see their market share and profitability decline over time, while the hydrogen firm increasingly prospers. These trends are stronger the stronger are the consumers’ environmental concerns. On the normative side, the privately optimal pace of investment is slower than the socially optimal pace of investment, suggesting policies that would foster the introduction of the hydrogen technology.