The car industry is one of the most innovation intensive industries in the European Union. It invests around EUR 20 m per year in R&D, thus being one of the EU’s largest R&D investors. Technological progress is transforming the industry from a traditional manufacturing-based sector into an increasingly knowledge-based one. To be competitive, comfortable, safe and environmentally-friendly, new vehicles must incorporate the latest technologies. “Europe 2020” presents a European strategy for smart, sustainable and inclusive growth. It sets a successful exit from the most recent financial and economic crisis as a short-term priority, whereas achieving a sustainable future is viewed as a long-term priority. Alongside other policy instruments, public support could be used to help the European economy get out of the crisis. The car industry has been one of those industries that could receive public support to counteract the crisis by getting credit moving again as well as by boosting demand, supporting the development of “green cars”, and spurring “smart” investment. However, although the public support can help address the short-term challenges that the automotive industry faces, the long-term competitiveness of the industry may be undermined, e.g., by postponing solving structural problems (such as overcapacity) for the future. The state aid control foresees that any public support (independently from its primary objective such as environmental improvements, R&D stimulation, or fostering demand, etc.) should not have any distortionary effects on trade and competition. In this project we investigate the effects of public support in the European car industry on competition. Specifically, we analyze the impact of selected public support measures (in particular, subsidized state loans and scrappage subsidies) on industry structure and estimate their welfare implications. With this purpose we follow two complementary approaches. First, we estimate a structural oligopoly model for the European car market to perform several policy counterfactuals, e.g., exit of a car producer. Second, we follow a treatment effects approach to analyze the effectiveness of demand-stimulating public support measures such as scrappage subsidies in fostering the overall demand for cars and demand for fuel-efficient cars. We discuss our findings in terms of implications for public support policy in the European car market and how the public support to the industry may hinder or strengthen the competitiveness of the European car industry. Eventually, we aim to suggest the methodological approach to the welfare analysis of state aid that could be used (e.g., by competition authorities) for other industries and markets as well.The research programme "Strengthening Efficiency and Competitiveness in the European Knowledge Economies (SEEK)" is funded by the State of Baden-Württemberg.Additional information regarding the SEEK Research Programme.