Consumer Subsidies with a Strategic Supplier: Commitment vs. Flexibility

60 Pages Posted: 16 Sep 2014 Last revised: 4 Mar 2017

See all articles by Jonathan Chemama

Jonathan Chemama

Ecole Centrale Paris

Maxime Cohen

McGill University

Ruben Lobel

University of Pennsylvania - Operations & Information Management Department

Georgia Perakis

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

Date Written: September 14, 2014

Abstract

Governments use consumer incentives to promote green technologies (e.g., solar panels and electric vehicles). Our goal in this paper is to study how policy adjustments over time will interact with production decisions from the industry. We model the interaction between a government and an industry player in a two-period game setting under uncertain demand. We show how the timing of decisions affects the risk-sharing between government and supplier, ultimately affecting the cost of the subsidy program. In particular, we show that when the government commits to a fixed policy, it encourages the supplier to produce more at the beginning of the horizon. Consequently, a flexible subsidy policy is on average more expensive, unless there is a significant negative demand correlation across time periods. However, we show that the variance of the total sales is lower in the flexible setting, implying that the government's additional spending reduces adoption level uncertainty. In addition, we show that for flexible policies, the supplier is better-off in terms of expected profits whereas the consumers can either benefit or not depending on the price elasticity of demand. Finally, we test our insights with a numerical example calibrated on data from a solar subsidy program.

Keywords: Government subsidies, Strategic supplier, Newsvendor

Suggested Citation

Chemama, Jonathan and Cohen, Maxime and Lobel, Ruben and Perakis, Georgia, Consumer Subsidies with a Strategic Supplier: Commitment vs. Flexibility (September 14, 2014). Available at SSRN: https://ssrn.com/abstract=2496157 or http://dx.doi.org/10.2139/ssrn.2496157

Jonathan Chemama

Ecole Centrale Paris ( email )

Paris
France

Maxime Cohen

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Ruben Lobel (Contact Author)

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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