The Effects of a Government’s Subsidy Program: Accessibility beyond Affordability

Abstract

Rural consumers may face not only the challenge of affordability but also the problem of limited accessibility. Can a government’s subsidy program effectively address these issues? This paper examines the impact of a large-scale subsidy program, “Household Electrical Appliances Going to the Countryside,” offered by the Chinese government. The government regulation imposes price subsidy combined with price ceiling on products in the program. We consider two effects of the subsidy: lowering the retail price to make the product more affordable to consumers and encouraging manufacturers to expand their distribution coverage to make products more accessible to consumers. We build a dynamic model of oligopoly to study how firms adjust their distribution coverage. Conditional on the model estimates, we evaluate the program’s effects on social welfare, consumer surplus, and firms’ market performance and marketing channel decisions through counterfactual analyses. We find that the subsidy program increases social welfare by CNY¥ 0.209 billion, as a result of a subsidy expense of CNY¥ 0.236 billion. When breaking down the impact, we find it increases consumer surplus by CNY¥ 0.184 billion (50%), manufacturers’ profits by CNY¥ 0.125 billion (53%) and manufacturers’ payoff by CNY¥ 2.5 million (17%). Specifically, 14% (13.2%) of the consumer surplus (firm profit) increase are from changes in distribution coverage, and the rest is from the subsidy (price changes). The program’s return of investment (i.e., social welfare minus subsidy expense), which is negative, however, could be improved by applying a relatively lower subsidy rate.

Keywords: distribution coverage expansion, dynamic games, subsidy program, adjustment costs, hassle costs