Improving consumer welfare and manufacturer profit via government subsidy programs: Subsidizing consumers or manufacturers?

Abstract

© 2018 INFORMS. Most consumers in rural areas of many developing countries cannot a ord to purchase certain livelihood improvement products such as home appliances. To improve consumer welfare and manufacturer profit, many governments launch di erent types of subsidy programs that o er subsidies to consumers, manufacturers, or both. Motivated by a subsidy program developed by the Chinese government in 2007, we present a parsimonious model to determine the optimal subsidy program in di erent settings so as to gain a better understanding about the conditions under which it is optimal for the government to subsidize consumers only, manufacturers only, or both. Our analysis reveals that the structure of the optimal subsidy program depends on (a) whether there is a well-established market selling price for the products; and (b) the relative emphasis that the government places on consumer welfare versus manufacturer profit. Also, we find that governments can improve consumer welfare by developing subsidy programs that involve multiple (competing) manufacturers with di erent market sizes and adequate capacities. Our findings provide insights for developing e ective government subsidy programs.