Economics Research Paper

Subject: Economics
Investigating the
potential changes in
the degree of
contestability in the
United States’ electric
vehicle market
RQ: To what extent has the degree of contestability
in the electric vehicle market changed in the United
States between 2014 and 2019?
Written by Juan Pablo Lopez Rojas
Examination Session: May 2020
Word count: 3,984

1
Table of Contents
Introduction............................................................................................................................................2
Background information.....................................................................................................................2
Economic Relevance ...........................................................................................................................3
Methodology.......................................................................................................................................5
The Theory of Contestable Markets ......................................................................................................6
Contestability in the EV Market.............................................................................................................7
Degree of Competition .......................................................................................................................7
Barriers to Entry/Exit ..........................................................................................................................9
Demand-side barriers.....................................................................................................................9
Supply-side barriers......................................................................................................................11
Degree of information on market conditions...................................................................................13
Lack of profitability ...........................................................................................................................14
Conclusion ............................................................................................................................................19
Bibliography..........................................................................................................................................21
Appendix A ...........................................................................................................................................26
Appendix B............................................................................................................................................27

2
Introduction
Background information
In 2014, the United States was the largest electric car market in the world (Perkowski,
2014). To put this into perspective, 118,773 electric vehicles were sold in the U.S. in 2014
(EVTC, 2015). With the United States’ electric vehicle (EV) market growing, EV sales
reached 361,307 in 2018 (Inside EVs, 2018) — a 304% increase from 2014. This strong sales
performance was largely influenced by Tesla, an American automotive and energy company.
In 2018, the electric-automobile company sold 139,782 units of the Model 3 (Inside EVs,
2018). When including the Model S and the Model X, Tesla was responsible for more than 50
percent of total plug-in vehicles sales (Pyper, 2019).
However, Tesla competes with other car companies such as Nissan, Toyota, and
Chevrolet. The EV market can be considered an oligopoly; a market dominated by a small
number of firms who are interdependent in their pricing and output decisions (OECD, 2003).
Although Tesla competes in an oligopoly, they realize that they can’t achieve their mission
— “to accelerate the electrification of transport” — on their own (Evannex, 2019). Thus,
Tesla wants other automakers to become involved as a growing EV market would benefit
their business in many ways. This welcoming of potential competition signals a diffusion of
market power, leading to more firms entering the market. Hence, with potential changes in
the degree of contestability in the EV market, this essay aims to answer the following
research question: “To what extent has the degree of contestability in the electric vehicle
market changed in the United States between 2014 and 2019?”

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Economic Relevance
Contestability affects market outcomes through its impact on the decisions made by
economic actors in a market. With potential changes in the degree of contestability, the firms’
and government’s actions are influenced, subsequently affecting consumer behavior and
demand. Factors such as the costs, output, price and market growth are also affected.
Nowadays, this is increasingly relevant due to the importance of combating climate
change by lowering the high levels of air pollution and greenhouse gas emissions. In the U.S,
transportation is the largest source of greenhouse gas emissions. As demonstrated in Figure
1, light-duty passenger vehicles account for
roughly two-thirds of those emissions (U.S.
Environmental Protection Agency, 2015). EVs
do not directly emit greenhouse gases during
operation, but when electricity is generated to
recharge the vehicle batteries, EVs indirectly
produce greenhouse gas emissions. Nonetheless,
in the U.S, EVs charged from the electricity grid
generate lower greenhouse gas emissions
than the average gasoline-powered car
(with a fuel economy of 27 miles per gallon) — even when the electricity is produced from
coal in regions with the most polluting electricity grids (Union of Concerned Scientists,
2012).
Although it seems that the Trump Administration disregards these potential benefits
— thus not prioritizing the acceleration of EV adoption and limiting the use of petrol cars —
there are still several government initiatives that are incentivizing the supply and demand for
(Figure 1. U.S. Environmental Protection
Agency, 2015)
U.S. Transportation Sector Greenhouse
Gas Emissions by Source

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EVs. The potential diffusion of market power may lead to EVs becoming cheaper to produce
and purchase due to factors such as economies of scale, increased competition and lower
costs/prices. This may increase EV adoption, which could diminish the negative externalities
of consumption from gas-powered vehicles and help repair the market failure of greenhouse
gas emissions. Therefore, in the future, there may be no need for government intervention to
achieve these socially desirable outcomes.

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Methodology
The methodology employed will firstly consist of understanding the theory of
contestable markets. This economic theory will then be applied to the U.S. electric vehicle
market throughout the essay.
To answer the research question, this investigation will explore relevant economic
concepts, including: degree of competition, barriers to entry/exit, degree of information on
market conditions, and lack of profitability. Changes in each factor – occurring between 2014
and 2019 – will be analyzed. During this process, other analytical tools from economics will
be used. This includes data handling and the construction and interpretation of diagrams
(principally addressing market outcomes such as revenue, costs, and profits). Upon
examining the EV industry through the different factors in contestability, this investigation
will end with a conclusion that provides an answer to the research question.
Data gathering will mostly consist of obtaining data from secondary sources. This is
the most reliable and efficient method as these sources provide extensive qualitative and
quantitative data gathered from field experts. As this paper examines the EV market at a
national level in a country that is distant from the author of this essay, it is more efficient to
focus on secondary sources which can provide national statistics and specific figures from
firms in the market. All these aspects render secondary data more useful than primary data in
this investigation.
The research method involves substantial data collection and cross-checking from
various secondary sources, including: statistical figures, university research papers, academic
papers, industry publications, online articles, videos, graphs/tables, and database platforms
(ex. Statista, Inside EVs). Nevertheless, some primary sources such as government
publications and annual reports will be used.

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The Theory of Contestable Markets
Contestable market theory describes a market in which there are few firms that
behave in a competitive manner due to the threat of new entrants. It revolves around the idea
of potential competition, meaning that any market is contestable to a degree. The main
characteristics of a contestable market are:
1. Low barriers to entry/exit
2. Access to a wide degree of information regarding market conditions
o Access to the same level of technology
3. Large pool of potential entrants
4. Movement towards point B in Figure 2; the Entry Limit Price (AR = AC), where
normal profits are made
5. Subject to “hit and run” competition in the short-ruin
(Figure 2. Author’s own diagram, 2019)
Contestable Market Diagram

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Contestability in the EV Market
Degree of Competition
Changes in the degree of competition in the EV market serve as an initial indicator of
potential changes in contestability. In 2014, consumers in major US cities could choose from
around 5 to 15 EV models (ICCT, 2015). This small variety of options for a main market
segment — those living in major cities — signals low contestability as there is a low level of
potential competition, a result of high barriers to entry/exit and other factors. The Nissan Leaf
led the market with over 30,000 units in sales, or about one fourth of the plug-in EV market
(ICCT, 2015). Table 1 shows the seven EV models that dominated the EV market in 2014,
making up 88% of total U.S.
electric vehicle sales (Hybridcars,
2015). These models are
manufactured by six automobile
companies, which evidently had
the most market power. The
dominance of these firms, ensued
from their most selling EV models,
acted as an entry barrier for
startups and automobile companies
who were not manufacturing EVs yet. This is because the high market concentration
discourages others from entering the market as it is difficult to gain significant market share
and high EV sales, making it harder for them to succeed in the market. The small variety of
models on offer and high market concentration limits potential competition, which signals
low contestability within the EV market in 2014.

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With the EV market growing over this 5-year period, there are currently more than 40
plug-in EVs for sale in the U.S (Berman, 2019). Whilst some of the best-selling EVs in 2014
remain at the top, Figure 3 shows the presence of other models, such as the Jaguar I-PACE
and the new Audi e-tron. This
not only shows an increase in
the variety of models on offer,
but it also demonstrates that
more automobile companies are
joining the market. For
instance, the Audi e-tron is the
company’s first electric mass
production vehicle, which
launched in May 2019 (Audi, 2019). Though this all
indicates that contestability has increased — as there is a higher threat of entry — Tesla’s
drastic increase in market share signals the opposite. In 2019’s first quarter, 75% of all EVs
sold in the U.S. were Teslas. The Model 3 accounted for 60% of U.S. electric vehicle sales,
whilst the higher priced Model S held 8% and 7% from the Model X (Cleantechnica, 2019).
To achieve such figures, Tesla’s monopoly power has necessarily increased. This has
potentially strengthened barriers to entry/exit, leading to lower contestability. Though the
number of models and firms in the EV market has increased, Tesla’s surging monopoly
power might have restrained contestability.
(Figure 3. CleanTechnica, 2019)
US Electric Vehicle Sales (Q2 2019)

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Barriers to Entry/Exit
Demand-side barriers
The degree of contestability in the EV market is greatly influenced by the types of
barriers and the actions/incentives to overcome these barriers. A first demand-side barrier is
the high initial cost. An EV costs more than an ICE vehicle (EVTC, 2015) — one that has an
internal combustion engine such as petrol and diesel cars (ElectricCarHome, 2019). The
higher initial cost deters consumers from purchasing an EV. Though consumer attitude
towards EVs has improved since 2014, high initial cost still significantly discourages
consumers from purchasing an EV. According to a survey by Autolist.com (2019), out of
1,567 car shoppers in August, around 42% answered that the high price of an EV (compared
to similar gas vehicles) is a major reason that is stopping them from buying an EV. This
lowers the demand for EVs, which inhibits movement towards the sales maximization point
and reduces the threat of entry into the market as firms are discouraged by the low level of
demand. This suggests that demand-side barriers such as high initial costs lower the degree of
contestability in the market.
To combat this demand-side barrier, the federal and state governments have passed
laws and regulations that incentivize EV purchase through cost reductions. In 2014, at the
federal level, EV purchase granted personal income tax credits — “an amount of money that
taxpayers can subtract from taxes owed to the government” (Investopedia, 2019) —at
between $2,500 to $7,500 depending on its battery size. For instance, the Nissan Leaf and
Chevrolet Volt were eligible for the $7,500 tax credit. Table 2 (please refer to Appendix A)
provides a list of 23 different types of EV incentives given by 37 states in 2014.

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From 2014 to 2019, the types of barriers to entry/exit haven’t changed. However, with
technological advancements and other progress, the size of these barriers has reduced over
this time period. Using the
figures shown in Figure 4, the
author of this essay calculated
that lithium-ion battery prices
have dropped by around 70%
since 2014. With battery costs
currently accounting for
almost half the price of an EV,
the falling battery costs have
led to reductions in vehicle prices. This not only reduces the cost barrier for firms, but it also
tackles a major demand-side barrier — 60% of surveyed consumers stated that they wouldn’t
pay a premium for an EV (Plautz, 2018). Cheaper batteries and manufacturers building more
assembly lines — leading to economies of scale — have continued to drive down EV prices,
spurring demand. This incentives firms to produce EVs, which increases the threat of entry
and signals higher contestability in the market.
Contrastingly, Trump’s administration has threatened to eliminate the $7,500
consumer EV tax credit (Shepardson, 2019). As this would be detrimental for automakers,
many lobbied to keep the incentive in the 2017 tax overhaul and managed to temporarily
keep it. Uncertainty in 2019 over the future of demand-side policies that foster consumer
adoption affects purchase and production decisions. This growing uncertainty acts as a barrier
for firms and consumers, which lowers the degree of contestability in the market.
Nevertheless, many states and utilities continue to provide incentives. According to
Amanda Myers (2019), a policy analyst at Energy Innovation, “California is expected to
(Figure 4. BloombergNEF, 2019)
Lithium-ion battery price survey: pack and cell split

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reform its Low-Carbon Fuel Standard EV program in 2019 from a utility rebate to a point-of-
purchase rebate to help consumers drive EVs off dealership lots”. Several utilities are also
providing EV incentives and charging infrastructure — as shown in Table 3 (please refer to
Appendix B). The proposal and implementation of such demand-side incentives increases
consumer adoption. This attracts more firms into the market and increases contestability as
low EV adoption is a major barrier to entry, requiring a higher level of demand to make
profits.
Supply-side barriers
The number of charging stations acts as another barrier for consumers and firms. This
is because consumers fear about the range of an EV (also known as “range anxiety”), and
therefore want to be assured that charging stations are vastly available before purchasing an
EV. This leads to supply-side barriers as firms need to spend money on complements like
charging stations to tackle these EV adoption barriers. The installation of charging stations
adds on expenses and contributes to sunk costs. Factors like these disincentivize firms from
entering the EV market, thus reducing contestability.
To combat this barrier, the federal government — as well as state governments — has
heavily subsidized the installation of charging stations. Companies like Electrify America —
a national EV charging network — are also expanding charging infrastructure across the
nation. In 2014, there were 9,187 charging stations supplying 23,157 public charging outlets
in the United States (EDTA, 2014). The state of California led the U.S. with over 20% of the
charging stations and outlets. As of May 2019, there are over 20,000 charging stations with
more than 68,800 connectors in the U.S. (Department of Energy, 2019). Once again, the
highest number of stations are in California; the most EV friendly state which offers 5 types
of incentives. As a result of government incentives and a growing EV market, the total

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number of charging stations has increased over this time period. This is reducing a major
demand and supply-side barrier, which leads to an increase in contestability.
Overall, the same types of barriers to entry/exit have remained in the EV market from
2014 to 2019. Due to their impacts on the supply and demand of EVs, some firms feel
discouraged to join the market. They do not only prevent entry into the market, but they
equally act as barriers to exit because they are obstacles that prevent a firm from leaving the
market. A main example of this is the high sunk costs that would occur when leaving the
market as a result of the high capital costs incurred when buying land, factories, equipment,
and other necessary assets to implement infrastructure for EV production. This reduces the
potential threat of competition, making the EV market less contestable.
Though a contestable market is characterized by low barriers to entry/exit, this aspect
of the theory is considerably criticized because there are notable barriers to entry/exit when
entering several markets. In the EV market, it is unavoidable to face considerable barriers to
entry/exit due to the nature of the industry. Therefore, although the EV market still faces
several barriers in 2019, this doesn’t determine that contestability has hardly changed. The
key takeaway is that the size of several barriers to entry/exit has reduced over this time
period, which has led to higher contestability in the market.

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Degree of information on market conditions
Access to technology plays a major role in increasing contestability within the EV
market. Although automobile companies in the EV industry typically own patents to protect
their technology, Tesla changed direction with a major announcement on June 12, 2014.
Tesla announced that it “will not initiate patent lawsuits against anyone, who in good faith,
wants to use our technology” (Musk, 2014).
By releasing their patents to the public — thus granting access to their knowledge and
technology — other firms are more willing and able to manufacture their own EVs. This
reduces significant entry barriers as entrants no longer incur as many expenses related to
R&D and other factors. The reduction of such supply-side barriers is crucial in the eyes of
Tesla’s CEO, Elon Musk, as conveyed in the announcement when he stated that “if we clear a
path to the creation of compelling electric vehicles, but then lay intellectual property
landmines behind us to inhibit others, we are acting in a manner contrary to that goal” (Musk,
2014). With the open source philosophy, firms are keener on joining the market as there are
fewer barriers and they can compete on a more leveled playing field. All of this increases the
degree of contestability in the EV market.
However, automotive incumbents might be less attracted to adopt Tesla’s technology
as they have developed their own technologies. John Paul MacDuffie, a professor of
management at Wharton, has said that “all big automakers in the U.S. have been exploring
and patenting electric vehicle and battery technology for a long time”
(Knowledge@Wharton, 2014). Therefore, Tesla’s free-to-use patents might appeal more to
startups who now see an easier way in, potentially leading to higher contestability.
Tesla’s open source philosophy has been in place for 5 years, but no data — relating
to its impact on the EV market — is available to the general public. Though this limits the

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ability to assess and quantify its influence on contestability, evidence shows that Tesla is no
longer the only one making their EV technology and technical knowledge accessible to the
public. In April 2019, Toyota announced that they will offer free access to around 23,740
patents related to electrification technologies (Toyota Motor Corporation, 2019). They will
also provide “fee-based technical support to manufacturers developing and selling EVs using
Toyota’s motors, batteries, and other technologies” (The Japan Times, 2019). In the
announcement, Shigeki Terashi — Toyota’s Executive Vice President — stated, “we believe
that now is the time for cooperation” (Toyota Motor Corporation, 2019). This shift towards
more cooperation is seen through an increasing number of partnerships, such as Ford and
Volkswagen’s recently announced collaboration on the development of EVs (Etherington,
2019). Overall, this increases contestability as it encourages firms to enter the market without
having to independently tackle entry barriers.
Lack of profitability
The EV market is known to lack profitability and the situation has hardly changed
between 2014 and 2019. Although there are few firms that solely produce EVs like Tesla,
firms such as Toyota (which also sell ICE vehicles) have similarly faced losses (in terms of
accounting profit) in their EV programs. Making profit from EVs has been a challenge for
automakers, mainly due to the high production costs. For instance, EVs usually cost $12,000
more to produce than similar ICE vehicles in the small to midsize car segment and the small
utility vehicle segment (McKinsey & Company, 2019). This not only makes it difficult for
EVs to become profitable, but it also acts as an entry barrier that deters potential entrants,
thus reducing contestability.

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As there are no figures for the overall profits in the EV market, the following section
analyzes Tesla’s total revenue and total profit from 2014 to 2019. This is because Tesla is one
of the few firms that only produces EVs in the U.S, and data on the profits of firms like
Toyota includes the profits made from ICE vehicles. Therefore, analyzing Tesla’s profits
provides a representation of profitability within the EV market. However, no data could be
found regarding Tesla’s revenue and profits in the U.S. market only, which further limits the
accuracy and reliability of this analysis.
Figure 5 shows that Tesla’s total revenue has increased each year due to growing
sales. This signals growing demand for EVs, which decreases the level of demand necessary
to break-even or make profits. This reduces the size of the entry barrier related to EV
adoption, leading to increasing contestability over this time period.
(Figure 5. Author’s own graph, 2019)

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Figure 6 shows that the size of their losses augmented each year until 2017 (except
from 2015 to 2016) but have drastically decreased since then. Losses generally signal lower
levels of contestability as they take away the incentive for firms to enter the market.
However, the size of losses reducing from 2017 to 2019 may have led automakers to believe
that EVs are on their way to becoming profitable. For instance, General Motors expects its
EVs to become profitable by 2021 (Narayanan, 2018). With growing confidence in 2018 and
2019 regarding the future of EV profitability, this may incentivize entrance into the market.
As most firms joining the EV market are established manufacturers who can afford making
losses from selling EVs, it is reasonable to speculate that some would take this decision.
Although figures 5 and 6 include a prediction of Tesla’s total revenue and total profit
by the end of 2019, it is still useful as it shows that Tesla’s total revenue will keep increasing,
whilst the size of their losses will decrease. This prediction seems reasonable until now, as
shown below by Figure 7, which demonstrates that Tesla has generated more revenue from
Q1 to Q2 in 2019, whilst making a smaller loss in Q2.

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Throughout the 5 years, incumbent firms in the EV market have remained
unsusceptible to “hit and run” competition (tends to occur in a contestable market due to low
barriers to entry). This is because firms in the EV market have not made supernormal profits,
so they are not vulnerable to potential entrants who are seeking to grab supernormal profits.
Also, there are still high sunk costs in this market, which prevents a firm from quickly
leaving the market as seen in “hit and run” competition.
Diagram for the EV Market from 2014 to 2019
(Figure 8. Author’s own
diagram, 2019)

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Figure 8 represents the costs, revenue and losses within the EV market from 2014 to
2019. From 2014 to 2019, firms have generated more total revenue, thus increasing the area
of rectangle P1Q1. Although a contestable market isn’t usually characterized by a loss (as
shown by rectangle P2CB), firms in the EV market are trying to move towards point B
(where AR = AC), which is an objective in a contestable market. In a contestable market this
happens because of supernormal profits in the short-run, causing firms to lower their profit
margins to try to eliminate the threat of entry. In the case of the EV market, firms are trying
to increase their profit margins in order to break-even and generate profit. This opposite
behavior leads to some contestability in the short-run as increasing the profit margins (by
lowering costs, as represented by the purple arrow in Figure 8) and working towards
abnormal profits provides an incentive to enter the market, thus increasing the threat of entry.
However, the persistence of losses acts as a barrier to entry and suggests that “hit and run”
competition is not possible. This is likely to outweigh the previous point, thus showing that
the losses have been a consistent source of lower contestability. Nonetheless, it is likely that
the fluctuating losses had little influence on changes in contestability.

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Conclusion
It’s fair to say that the degree of contestability in the U.S. electric vehicle market has
increased to a certain extent between 2014 and 2019. The rise in the degree of competition is
a first indicator of increasing contestability. The growing number of firms in the market and
higher variety of models on offer signals that there is a rising threat of entry into the market,
and thus contestability. However, Tesla’s surging market share acts as an entry barrier and
makes it difficult for entrants to compete with them, thereby restraining contestability.
Despite various high barriers to entry/exit — on the demand and supply-side — the
size of these barriers has reduced, which reinforces the conclusion that contestability has
increased. Government intervention on both sides and technological advancements — which
have lowered production costs, thereby influencing EV prices — are two ways in which this
progress has been made. Nevertheless, it is hard to quantify the reductions in the size of
barriers, which makes it difficult to reach a concrete conclusion and leads to inaccuracies.
Furthermore, the degree of information on market conditions increased over the 5-
year period mainly due to the release of thousands of free-to-use patents. Tesla’s open source
philosophy potentially influenced other incumbent firms — such as Toyota — to follow their
steps in terms of providing access to a wide degree of information regarding EV technology.
Though it remains uncertain whether the use of Tesla or Toyota patents is widespread, such
initiatives allow entrants to have broader knowledge on market conditions; a signal of
increasing contestability.
Contrastingly, the lack of profitability in the EV market has been a consistent source
of lower contestability. However, upon analyzing Tesla’s losses, it is likely that the
fluctuating losses had little influence on changes in contestability. Nonetheless, using Tesla’s
profit figures – as there is no data for the overall profits in the EV market – led to several

20
limitations. For instance, Tesla sells other products such as solar panels and clean energy
storage systems, meaning that the profit figures were also altered by these goods. This leads
to a greater misrepresentation of profits in the EV market. Furthermore, Tesla’s losses could
have augmented (as seen in 2017) due to specific reasons related to the company’s operations
and not the entire EV market. Again, this prevented an accurate judgement on how changes
in profitability impacted contestability.

21
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26
Appendix A
(Table 2. EVTC, 2015)

27
Appendix B
Incentives provided by utilities for EVs and Charging Stations
(Table 3. Southwest Energy Efficiency Project, 2016)

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