Market competition and social welfare analysis for E10 and E85 with a game theory model

With the increasing concerns about the petroleum reserve, and the global warming, people have been looking for renewable and environmental friendly energy sources to supplement and replace fossil fuels. Ethanol has been an appropriate substitute to fossil fuels. Currently, E10 and E85 are two of the main transportation fuels with ethanol and they are competing in the market. This study investigates the competition between E10 and E85 with an oligopoly Cournot model and derives three indicators from the equilibrium to measure the performance of the market: E85's market share, E85 price premium which indicate the consumers' additional willingness to pay, and the social welfare which indicates the societal wellbeing from the products. The authors also studied how the government policies impact the market equilibrium, how the industry size affects the market performance of E85, and whether E85 has a bright prospect with the increase of FFVs number. The results not only provide some prospects of E85, but also benefit the policy makers by quantitatively showing the effectiveness of tax credits and other government policies to promote the ethanol industry.