The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption

Forthcoming in Management Science

44 Pages Posted: 14 Jan 2014 Last revised: 11 Jan 2015

See all articles by Maxime Cohen

Maxime Cohen

New York University (NYU) - Leonard N. Stern School of Business

Ruben Lobel

University of Pennsylvania - Operations & Information Management Department

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: January 8, 2014

Abstract

This paper studies government subsidies for green technology adoption while considering the manufacturing industry's response. Government subsidies offered directly to consumers impact the supplier's production and pricing decisions. Our analysis expands the current understanding of the price-setting newsvendor model, incorporating the external influence from the government who is now an additional player in the system. We quantify how demand uncertainty impacts the various players (government, industry and consumers) when designing policies. We further show that for convex demand functions, an increase in demand uncertainty leads to higher production quantities and lower prices, resulting in lower profits for the supplier. With this in mind, one could expect consumer surplus to increase with uncertainty. In fact, we show this is not always the case and the uncertainty impact on consumer surplus depends on the trade-off between lower prices and the possibility of under-serving customers with high valuations. We also show that when policy makers such as governments ignore demand uncertainty when designing consumer subsidies, they can significantly miss the desired adoption target level. From a coordination perspective, we demonstrate that the decentralized decisions are also optimal for a central planner managing jointly the supplier and the government. As a result, subsidies provide a coordination mechanism.

Keywords: Government Subsidies, Green Technology Adoption, Newsvendor, Cost of Uncertainty, Supply Chain Coordination

Suggested Citation

Cohen, Maxime and Lobel, Ruben and Perakis, Georgia, The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption (January 8, 2014). Forthcoming in Management Science. Available at SSRN: https://ssrn.com/abstract=2376662 or http://dx.doi.org/10.2139/ssrn.2376662

Maxime Cohen (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Ruben Lobel

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Georgia Perakis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-565
Cambridge, MA 02142
United States

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