The Effects of Subsidies on Increasing Consumption through For-Profit and Not-For-Profit Newsvendors

Production and Operations Management, Forthcoming

33 Pages Posted: 24 Aug 2016

See all articles by Gemma Berenguer

Gemma Berenguer

Purdue University

Qi Feng

Purdue University - Krannert School of Management

J. George Shanthikumar

Purdue University - Krannert School of Management

Lei Xu

Shanghai Jiao Tong University - Antai College of Economics and Management

Date Written: August 21, 2016

Abstract

Subsidy programs are widely offered in both developing and developed countries to encourage consumption of products that generate positive social, health and environmental externalities. We study the effect of subsidies on product consumption under uncertain market demand. To reach a target consumer population, the program sponsor may subsidize a for-profit or a not-for-profit firm on each unit of the product purchased by the firm or on each unit of the sale generated by the firm. We show that subsidy programs provide stronger incentives to a not-for-profit firm than to its for-profit counterpart in inducing a large consumption whenever the sponsor is having a very limited budget or a very generous budget. When subsidizing a not-for-profit firm, the sponsor should always choose the purchase subsidy over the sales subsidy, because the former can induce a larger consumption than the latter with the same subsidy spending. However, this is not always true when the subsidy program is administered through a for-profit firm, unless the firm is a price taker in the market or the sponsor has a limited budget. Our analysis leads to new theoretical development of price-setting newsvendor problem for both the for-profit and not-for-profit operations under subsidy.

Keywords: Newsvendor Model, Pricing, Not-For-Profit Operations, Subsidy

Suggested Citation

Berenguer, Gemma and Feng, Qi and Shanthikumar, J. George and Xu, Lei, The Effects of Subsidies on Increasing Consumption through For-Profit and Not-For-Profit Newsvendors (August 21, 2016). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2827299 or http://dx.doi.org/10.2139/ssrn.2827299

Gemma Berenguer

Purdue University ( email )

403 W State St
West Lafayette, IN 47907
United States

Qi Feng (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

J. George Shanthikumar

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Lei Xu

Shanghai Jiao Tong University - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai, 200030
China

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